A Routine Stock Market Pullback (EP.164)

0:28We all need to make smart decisions with our money. has fallen about 8.5 % from its high over the last 14 days. Now, I actually had another topic ready to go for this week, but felt it was necessary to comment on the latest market movements. And as someone who tries to educate and guide others through financial decisions, I always struggle with whether or not to comment on these types of declines because on one hand, I realize that they cause investors anxiety. But on the other hand, I also know that this type of decline is rather routine. So if we just look at the S &P 500 since 1928, consider that 94 % of years experience a decline of 5 % or more.

1:1064 % of years experience a decline of 10 % or more. 40 % of years experience a decline of 15 % or more. And 26 % of years experience a decline of 20 % or more. And this is actually the second 5 % pullback in 2024, which is in line with historical averages. Again, if we look at the S &P 500 going back to 1928, we can see that we average 7.2 declines of 3 % per year. We average 3.4 declines a year of 5%. We average just over one decline of 10 % per year. And then we have a 15 % per year decline once every two years and a 20 % or more decline once every three and a half years. So as of this recording, we haven't reached the point of a 10 % decline just yet.

2:00And that's a level that most define as a quote, correction. But we shouldn't be surprised if that happens. And similarly, we shouldn't be surprised if there's a full recovery before that happens. In the show notes at the longterminvestor.com, I'm going to share a chart from JP Morgan that they update every quarter showing the S &P 500's intra-year declines versus the calendar year returns. And what you'll see there is that the S &P 500 averages an annual drawdown of about 14%. But in most years, it recovers those losses and finishes the year higher. So while we can consider this market decline to be routine, you might still be curious as to why the market is falling.

2:44And if you've been listening to me for a long time, you know that I believe that complex adaptive systems like stock market movements can't really be perfectly explained by a tidy cause and effect term. But I'll get off my high horse for a second and talk about the prevailing narrative, which is that the job market's cooling to the point that recession concerns are heightened. To be clear, the job market is still quite strong, and this cool down was somewhat expected after four years of the labor market being the economy's bright spot. And in fact, I think most economists would argue that the job market was maybe too hot for the past few years.

3:22But the labor market cooling combined with the Federal Reserve's decision to maintain relatively restrictive monetary policy at its July meeting has led market participants to price in slower growth ahead. The Federal Reserve's policy setting committee meets in September next, And they're widely expected to cut interest rates now that inflationary pressures are finally easing and the labor market is showing these signs of coolings. And in my opinion, and mind you, I don't make any investment moves based on my opinion or the opinions or forecasts of anyone else. But all that said, I would expect the market to rally as the Fed cuts rates and if the following earnings season meets expectations.

4:04So all this said, what do you do in a market sell-off? Given the routine nature of stock market declines, I actually have a template blog post that I pull out and dust off anytime the S &P 500 falls 10%. And each time it happens, I start with a template for what I want to say, and I make some adjustments based on the current market headlines. This might sound lazy, and maybe it is, but the fact of the matter is that good financial advice doesn't change. And time and again, financial theory tends to prevail in the long run. So I thought what I would do here to close out is share those four talking points that are on my template that I pull up during every market correction.

4:44Number one is that predicting the future is extremely difficult. Part of what makes prediction so difficult is that not only do you have to predict the outcomes of macroeconomic events, but you also have to predict how those events will impact financial markets. Because the market's made up of millions of participants, each using all available information and expectations of the future to drive asset prices to a very close estimate of the present value of future cash flows. So when you are making an investment based on a prediction, what you're really doing is pitting your knowledge against the collective knowledge of all market participants.

5:20So I think it's really important to realize that your opinions and any information you hold, unless it is material non-public information, that information is going to already be mostly incorporated into current prices. Point number two, there is always uncertainty in investing. The future is unknowable and there are risks inherent to that. Our success in managing those risks are really what's going to determine how successful we are financially. And we never know when the next correction or bear market will happen, but we can manage our portfolios knowing that downturns will keep happening with a similar magnitude and frequency as they have in the past.

6:00And I'd argue that this uncertainty is a good thing because it's what allows stocks to provide a return that is higher than bonds or cash. And when we look back at times in where there were high degrees of certainty about the future, I think what you'll find is that we would typically identify that type of sentiment as a symptom of a pending market bubble and the precursor to a period of smaller equity returns. Point number three, disciplined investing isn't easy. So kind of related to the last point, stock investors are compensated for assuming the uncertainty of short-term returns. Because to receive a rational premium for owning stocks over bonds and cash, stocks occasionally need to lose value.

6:41And volatility, it is not the enemy. In fact, for long-term investors, it can work in their favor because the high volatility in the short run provides rebalancing opportunities while returns over the longer time horizons tend to be less volatile. So while the long-term feels like an eternity to live through in the moment, those that maintain discipline are rewarded over time. The fourth and final point, If you're feeling uncertain, review your financial plan before your portfolio. Human nature, along with easy access to real-time market data, makes checking your portfolio the typical first response during these types of periods of market losses and uncertainty.

7:22However, reviewing the underlying assumptions in your financial plan would be a far better course of action because a thoughtfully crafted financial plan takes those periods of bad performance into account and does so without emotion. And as a result, when you're reviewing your financial plan, you can know that the comforts of your lifestyle are protected. As always, you can find detailed show notes and resources at the longterminvestor.com. And if you're feeling uneasy and looking for an advisor to help guide you through these periods, you can go up and navigate to the top, the work with me page.

7:57You can learn all about working with me and my team at PlanCorp. Thanks again for listening. And until next time, to long-term investing. Thanks for listening to the Long-Term Investor podcast. To access free financial resources and submit questions to be answered on the show, visit thelongterminvestor.com. Peter Lazaroff is an employee of PlanCorp and BrightPlan. All opinions expressed by Peter and any podcast guests are solely their own opinions and do not reflect the opinions of PlanCorp or BrightPlan. This podcast is for informational purposes only. and should not be relied upon as a basis for investment decisions.

8:36Clients of PlanCorp and BrightPlan may maintain positions in the securities discussed in this podcast.