When I wrote to you about the selloff in equities last Friday (8/21/15) morning, I indicated I expected another 2-3% of potential downside. I didn’t, however, expect that to all happen that day.
The stock market looks pretty ugly again this morning (8/24/15). While the last few days have been bad I wanted to put it in perspective for you.
Generally a correction is considered a decline of 10% from the previous high. The stock market (basis S&P 500) had a 9.9% correction just last October (2014), yet finished higher for the year. This decline happened from 9/19/14 through 10/15/14, which was followed by a gain of 13.1% from the intra-day low on 10/15/14 through the end of the year. This gain was despite a 5.1% decline between the intra-day high on December 5, 2014 through the intra-day low on December 16, 2014 (source: Yahoo Finance)
As of the closing price on Friday 8/21/15, the S&P 500 has declined 7.7% from its previous intra-day high on May 20,2015. The S&P would have to decline to 1,921 to reach correction territory (it traded below this level early on 8/24/15 but let’s see where the market closes).
Generally, a less than 5% drop is considered a “pause,” a 5% – 10% slide is termed a “dip,” a 10%+ decline is a “correction,” and a 20%+ plummet is a “bear market.” Here is a great chart on the size, and frequency of these level of declines.
Source: Advisors Capital Management
The moral of the story is that the current declines in the stock market are quite concerning but not at all unusual. As such I am not taking any significant action at this time.
Here is an article from Jack Bogle – the founder of Vanguard – about how he is dealing with this situation.
“Don’t do something. Just stand there,” he quips. Aside from concerns about debt, the long-term fundamentals in the U.S. economy are sound, he pointed out. Unless you need your money in the short term, leaving your money in a portfolio with the right weighting of stocks for your age and risk tolerance still gives you the best chance for success in the long term—even in a volatile or falling market. Bogle himself isn’t making a move.
Feel free to call me with any questions or concerns.
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