Last Week’s Market Dive: Gambling vs. Investing

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“The market is the most efficient mechanism anywhere in the world for transferring wealth from impatient people to patient people.” - Warren Buffett

 

While everyone is trying to enjoy these last few weeks of summer, the stock market is trying to ruin the party.  The current bullish U.S. stock market has gone 1,418 calendar days (almost four years) without so much as a 10% correction—the third longest such streak in the 50 years.          

But, a couple days ago, the S&P 500 was down 4% and last week the index fell 5.8%, making it the worst week for large US stocks since 2011. Is this the beginning of the end or just a blip on the screen?

And to what do we owe this recent downturn?

Primarily, investors worrying about oil and China and the Federal Reserve policy, sold off stocks and moved money into U.S. Treasury bonds and gold which put the Market into a tail spin.

What is the takeaway?  First, market corrections will happen, and while not fun, they can set the foundation for the next movement higher. Second, while there are realistic growth concerns worldwide, most large, non-energy multinationals will continue to grow earnings. Third, while periods of decline push every stock price lower, high-quality, strong cash flow generating businesses will thrive. Remember, periods of decline offer potentially great opportunities to buy stocks at a great value for the long-term!

Where does this downturn leave investors?

Let’s put things in perspective.  The S&P 500 has only fallen 7.5% from its all-time high, set in May, so ‘the reports of the Market’s death have been greatly exaggerated’. Even though the Market declined 5.8% last week, the underlying value of these S&P corporations didn’t deteriorate the same 5.8%.  Lastly, while we don’t know what the stock market’s fundamental value is, we know that U.S. stocks aren’t cheap. U.S. shares might be reasonably valued relative to U.S. bonds, which means those stocks and bonds may generate modest long-run returns from current levels. 

So now, the $100,000 question - what should investors do?   Experts are urging investors to stay the course.   If you’re regularly contributing to a 401(k) plan or feeding money into your IRA, continue as you were.   

Still wary of the Stock Market?  Do you think that investing in today’s Market is similar to gambling your money at the Casino?  Think again.  At the casino, the house always wins.  Since 1947, the S&P 500’s price return was up in 72% of calendar years, add in dividends reinvested and that batting average jumped to 80%1.  In other words, in most years, you’re more likely to see gains than losses.  Looking at 10-year periods during that same time, the median annual gain was almost 12%, and cumulatively, the S&P 500 rose an average 202% during each 10-year period.

The trick to achieve those gains is to stay in the market through the peaks and troughs instead of trying to time the market.  You will be potentially minimizing your risk by investing in a broadly diversified portfolio and holding onto it for a long time!2

 

[1]S&P Capital IQ equity strategist Sam Stovall.

 

[2] Diversification does not ensure profit nor protect against loss.

 


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