The Dow Jones Industrial Average declined almost 1,200 points yesterday, the largest one-day point decline in history. While the point move was very large, on a percentage basis, yesterday 4.6% decline wasn’t in the 30 worst trading days in history. Yesterday’s move followed Friday’s down day and pre-market trading implies stocks will open down sharply again today. Here’s how I’m thinking about the sell-off.
The stock market just experienced the strongest January performance since 1997 and a strong 2017. Even with the sharp decline in the last few days, the Dow and S&P 500 are at prices we saw in early December, just two months ago. The market hasn’t had a 10% ‘correction’ since late January and early February of 2016. Market corrections like this are very common and we’ve been in an extended period without this type of correction.
Investing is based on achieving long-term goals. Markets go up and down, but over the long-term stocks have trended upward. The goal is to buy quality companies at attractive prices. This sell-off is making a lot of quality companies less expensive than they were just a week ago. Warren Buffett likes to say that investors should be greedy when others are fearful and fearful when others are greedy.
Your portfolios are constructed with a mixture of stocks, bonds and cash. Bonds and cash provide stability, steady income and buying power should prices decline. Stocks allow for capital appreciation, but come with greater risk. Given the sharp increase we’ve seen in stocks over the last year, a couple of large down days doesn’t make me think we need significant changes to our strategy. The economy continues to grow, economic growth appears to be accelerating, corporate earnings remain strong and while interest rates are going higher, they remain at a very low level on a historical basis. Inflation is a risk, but overall, I think believe stocks remain an attractive and important part of a well-balanced portfolio.
If you have questions or want to discuss your portfolio more specifically, please let me know.