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Today's Selloff

The stocks market had a relatively sharp selloff today with the Dow Industrials down -1,175 points or -4.6%.  The S&P 500, a broader measure of the market, was down -4.1%.  Both are now in negative territory year-to-date by about -1% after being at record levels just 6 trading days ago.

Today's selloff was not triggered by any particular event or news headline.  The number of sellers simply outnumbered buyers by a wide margin and prices got adjusted downward.

Not Everything Declined

Stocks market around the world fell.  There were few places to hide if you owned only stocks.  A few things in a Super-Diversified Portfolio moved higher today including:

  • Gold: +0.25%
  • Commodities: +1.0%
  • Bonds: +0.82%

There is never any certainty that some investments will go up when stocks go down but it's not uncommon.  Today was fortunately a good example of how diversification can meaningfully help.  Furthermore, seeing some things go higher today shows that it was not a panic when everybody sells everything 

Bear or Bull Market Ahead?

One certainty that will come from this selloff is that the bears are going to get more airtime.  Here is the typical highlights from the arguments for  a bear market:

  • the bull market has gone on too long and stock are expensive
  • interest rates are going to move higher
  • inflation is in our future

These are valid points.

The bull market case generally goes as follows:

  • The U.S. economy, and economies around the world, are strong and showing signs of getting even better
  • Corporate earnings are growing at double-digits helped by the recent tax cuts making stocks less expensive
  • Consumers are going to have more money to spend due to the tax cuts which should further fuel the economy and earnings growth

These are valid points as well!  Therein lies the problem.  Both sides have valid points which is always the case.

The fact is that all of these points are no more valid today than they were 6 trading days ago when stocks were hitting record highs.  The only difference is that investors have chosen to interpret and react to all of these valid points differently during the last 6 days than they did during the past several months.  Predicting when investor sentiment is going to change like this is impossible and it's changes in investor sentiment that moves stock prices.

Some perspective on a down -4% day

I wrote about last week's market selloff in my Weekly Market Commentary.  I highlight that a day with a -2% drop or more, like we had Friday, occurs somewhat frequently.  Furthermore, the frequency of such drops has been about the same during the past 9 years, since the start of the bull market, as it has been during the past 50 years.

How about a -4% drop like we had today?  During the past 50 years, we have had 37 days when the Dow Industrials fell -4% or more.  More often than not they occur during bear markets or in the early stages of a bull market (typically not the end of bull market).

Here's a surprising reminder: in August 2011, we had three daily declines in excess of -4% in just one week's time!!!  The rating on U.S. government debt had been downgraded and markets around the world sold off.  The market bounded around for a few weeks with the Dow Industrials trading below 11,000 then resumed its move higher.  Any investor exiting the market then would have missed out on one of the greatest bull markets in history.

What's next?  What do we do?

I don't know what's next.  The stock market could snap back in a matter of days and continue its path higher.  That's what I would prefer!  The market could also decline further by an unknown amount and for an unknown length of time...if not now, the reality is that it will at some point.  We must accept this.

I DO know what to do!  I remain absolutely convinced that staying the course in a diversified portfolio is the best long-term investment decision.  Our Super-Diversified Portfolios have historically reduced a meaningful portion of the risk in long deep bear markets while also delivering strong positive long-term returns.  I believe the risk of missing significant future gains, like an investor would have done if they sold in August 2011 (as discussed above), is far greater than simply riding out the inevitable tough times.

Stay diversified and stay the course!

Thanks, Mark

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