Global stock markets had their roughest week in a few years, culminating with sharp declines Thursday Aug 20 and Friday Aug 21. After an abnormally long period without a significant decline (3+ years!), this volatility will certainly capture the attention of both the media and investors. Is this the long-awaited 10-20% correction? Or just a temporary set-back? An honest person will give you the honest answer that no one knows for sure, but I'll give you some info and thoughts to help steer you through whatever the markets have in store.
First, a picture. Here is the S&P500 Index over the past 10 years:
As you can see, we've had a smooth and strong rise since 2011. Even after the pullback the past few weeks the market is up 80%+ over that timeframe. At the close today the S&P is about 8% below the al-time highs reached three months ago.
To understand the reasons behind the declines, here are three articles summarizing the situation (the article will open in a new window):
A little over a month ago (July 9) I made a blog post discussing the possibility of a correction in the stock market, and what I said then is still true today:
"The US market hasn't had a correction (10%+ decline) in more than three years (corrections normally happen every 18 months or so), so we're way overdue for a pullback. Could this be a 30-50% collapse like we saw in 2008-2009? Most market analysts agree that stocks are not extremely overvalued and the backdrop isn't there for such a decline, but 10-20% would not be out of the question and in many was it would be healthy in the long run.
Bottom line: Whether we're at a correction point or not, it's always a good idea to consider your risk tolerance and goals and confirm how your investment portfolio is positioned. In most cases, a 20% decline in stocks would translate into a 10-15% decline in a balanced, diversified portfolio. If you have discomfort with the prospect of that happening, talk to me and we'll take whatever steps necessary to make sure you're positioned to ride out that scenario. And if you have cash, such a correction could be the time to buy."
Much like the recent 4.0 earthquake we had recently in the Bay Area, which came after a long period of no quakes, this decline may feel strong, but again much like the quake it's a natural part of the market cycles.
Should the outlook change, I'll share my thoughts and recommendations with you.