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How We Help Protect Your Portfolio in a Market Pullback

What Happened in the Markets This Past Week?

After a period of historic market tranquility in 2017, a few weeks ago we reallocated and rebalanced our portfolios in order to provide greater opportunities and to help reduce risk going forward into 2018. With the rapidly changing market conditions of the last week, it’s more important than ever to be sure you are diversified, and properly balanced and allocated. Because we took a pro-active approach to managing our clients' accounts, they are in a better position to weather the volatility that has been generally absent from the markets for the past year.

On Monday, February 5th, the S&P 500 Index and Dow Jones Industrial Average (DJIA) both fell more than 4%, marking the worst one-day percentage decline since August 2011. When combined with declines from last Friday, the last two trading sessions resulted in these indices falling more than 6%, bringing the indices back to levels as of mid-December 2017.

Remarkably, the recent sell-off ends a streak of more than 400 trading sessions since the last time the S&P 500 Index had experienced a 5% pullback (dating back to the Brexit vote of June 2016).

Asset Class

Index

January

Return

February

Return

(through Feb 5th)

YTD-2018

Return

(through Feb 5th)

U.S. Large Cap

S&P 500

5.7%

-6.1%

-0.8%

U.S. Large Cap

Dow Jones Ind Avg

5.8%

-6.9%

-1.5%

U.S. Small Cap

Russell 2000

2.6%

-5.3%

-2.8%

International

MSCI EAFE

5.0%

-3.0%

1.9%

Emerging Markets

MSCI Emrg Mkts

8.3%

-3.5%

4.5%

 

What Caused the Pullback?

There was not a notable development or headline that led to the recent market pullback; in fact, corporate earnings and global economic data have generally remained quite strong. Some have pointed to concerns over a pick-up in inflation, rising bond yields and waning central bank stimulus as potential factors behind the volatility. Other possible factors include stop-loss orders (which would have automatically triggered sales during the sharp intraday decline) and algorithmic trading (computer models which recognize the pace of the decline and in turn produce additional selling – a situation of “selling begets more selling”).

Is the Recent Market Move Unprecedented?

It is important to note that while the recent pullback has been sharp over a short period of time, the move is well within historical norms. Many headlines focused on the Dow Jones Industrial Average (DJIA) recording its biggest single day point decline (-1,175), though the percentage decline (-4.6%) was only its 100th worst single trading day, according to S&P Dow Jones Indices.

The fact that 2017 was such a unique and extended period of low volatility makes the recent market pullback feel extreme. Last year, the S&P 500 Index had a maximum peak-to-trough drawdown of only -3%; since 1928, the index’s average intra-year decline is nearly -14%. The S&P 500 Index did not decline by more than 2% on a single trading day last year, though it did so on 5 days in 2016, 6 days in 2015 and 4 days in 2014 (the index had 21 such days in 2011).

Frequency of Market Pullbacks (S&P 500 Index, 1928-2015)

Drawdown

Historical

Frequency

Typical

Occurrences

Per Year

Typical

Recovery

Time

-2%

Often

18

1-4 weeks

-3%

Once per Month

11

2-6 weeks

-5%

Once per Quarter

4

2-3 months

-10%

Once per Year

1

8 months

-20%

Once per Market Cycle

0

20 months

Source: Standard & Poor’s, FactSet, J.P. Morgan Asset Management (“Investing with Composure in Volatile Markets”)

What Should Investors Do?

While it is understandable for investors to feel frustrated or anxious in the midst of such market volatility, we continue to emphasize the importance of maintaining a longer-term view. While the markets have recently shifted lower, nearly all investors have the same time horizon today as they did a week ago. During periods of heightened volatility, investors often feel the need to “do something”, though short-term, reactive moves are often ill-timed and can significantly impair the effectiveness of a well-designed investment plan. So long as circumstances and long-term objectives have not changed, investors should adhere to their long-term investment plan and should thoughtfully rebalance over time.

If you have questions about your portfolio, we can help. We offer a no-obligation first consultation. You can schedule your appointment today by calling us at 216.521.1711, emailing us at Quarterback@Lineweaver.net, or by clicking here.

Securities offered through Triad Advisors, LLC, member FINRA/SIPC. Advisory services offered by Lineweaver Wealth Advisors, LLC. Lineweaver Wealth Advisors, LLC, is not affiliated with Triad Advisors, LLC.

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