There is an old saying that the stock market has correctly predicted ten out of the last two recessions. With the stock market opening down today after falling into correction territory yesterday, this saying has never been more timely.
The global stock market is struggling to deal with how the coronavirus will eventually affect the global economy. Will the coronavirus be a short-term correction similar to Brexit and the stock market tumble of late 2018, or will it be a longer lull as the coronavirus begins to cause a global economic slowdown? Only the combination of time and new information will tell. However, from a historical perspective, this magnitude of drawdown has been more the norm than outlier on an annual basis.
Since 1979 and through the end of 2018, the US stock market (as represented by the Russell 3000) has had an average annual intra-year decline of -13.8%. This means that, on average, the stock market has fallen almost 14% within each calendar year. However, even with that negative intra-year drawdown, the average annual return has been 12.8%, meaning that the stock market has bounced back from the large intra-year declines to end the year with strong positive returns. This is helpful in keeping the current market swoon in perspective. While it is uncomfortable to see markets fall, the uncertainty and risk are the same reasons investors are ultimately rewarded over the long-term.
Over the short-term, the question we’ve been getting this week has been: What is Durbin Bennett doing about it?
If this turns out to be a short-term blip that rebounds within several weeks’ time, then the best thing to do is ensure portfolios are rebalanced to target weights and stay the course. To that end, we have been and will continue to monitor and opportunistically trade back to target allocations while also weighing trading costs.
If, on the other hand, the coronavirus leads to a longer and/or larger drawdown, then the best thing to do would be to protect capital by investing in safe-haven assets (bonds) and buying stocks before the eventual rebound. In other words, keeping a diversified portfolio and rebalancing ensures your portfolio is in a good position to rebound from this correction—whether this is short-term or longer-lasting.
Outside of the stock market, the bonds in our portfolios have been positive this week, and the satellites are not expected to be immediately affected by the coronavirus scare. Having a diversified portfolio and rebalancing along the way puts you in a good position to weather the storm with less turbulence and ultimately capture attractive long-term positive returns the stock market has historically provided. Keeping a long-term perspective and focusing on your goals instead of daily returns can also help decrease the stress many stock market participants face.
Your team here at Durbin Bennett will continue to monitor markets as things progress. Please don’t hesitate to reach out if you have any questions or if we can be of further assistance.
In US dollars. Data is calculated off rounded daily returns. US Market is the Russell 3000 Index. Largest Intra-Year Gain refers to the largest market increase from trough to peak during the year. Largest Intra-Year Decline refers to the largest market decrease from peak to trough during the year. Frank Russell Company is the source and owner of the trademarks, service marks, and copyrights related to the Russell Indexes.
Past performance is not a guarantee of future results. Values change frequently and past performance may not be repeated. There is always the risk that an investor may lose money. Indices are not available for direct investment. Their performance does not reflect the expenses associated with the management of an actual portfolio. Past performance is not a guarantee of future results. Values change frequently and past performance may not be repeated. There is always the risk that an investor may lose money. Even a long-term investment approach cannot guarantee a profit.