The Dow Jones fell 1000 points today, the second time this week, and we are now in the midst of a good ole market correction. This shouldn’t surprise you, we see these all of the time. I wrote an article three weeks ago that you should be prepared for a 14% drop in the stock market. Now, I’m not a stock market psychic, and I am certainly not one of the ‘experts’ on CNBC that constantly forecasts market drops. I wrote the article because we see, on average, a 14% stock market correction. Every. Single. Year.
Here is a table that shows just how frequent these types of draw-downs happen:
Source: Charlie Bilello
A couple quick notes about this table:
- On average, 5% drops happen more than twice a year
- There have been ten, 9% drops in the past 9 years
- 2017 was the only year without even a 5% correction in the past 10 years
Now, it may feel like this drop is different, it’s not. Still, here are some reasons that it may feel different.
Markets were at all time highs
At the lowest point on Monday, the Dow Jones Industrial Average (DJIA), dropped over 1500 points. It finished the day losing 1175 points, the biggest point drop ever. Today, the DJIA lost the second most points ever. This sounds very scary when you hear about it on TV, until you realize just how high the market is today. The last time the market had a 10% correction, early 2016, the Dow Jones was just over 17,000 points. Last week, the Dow Jones hit nearly 27,000 points, 53% higher than in 2016! This means that your retirement savings was probably never higher than last week, and a 10% market drop never impacted your retirement savings as much. Don’t let this scare you.
Bonds haven’t helped
Typically a big market drop is offset by rising bond prices. This helps conservative investors smooth out market drops. Not this time. In 2016, during the same time we saw the last 10% drop in the markets, the U.S. Bond Index was up 2%. During this most recent market dip, bonds are down over 1% and bonds are down over 2% on the year. Unfortunately, bonds just haven’t helped conservative investors during this drop.
We’ve had no volatility for 2 years
2017 was one of the least volatile years on record. We average around a 14% market drop each year, and last year we didn’t even have a 3% drop. We have essentially seen a straight up, no volatility market for the past 2 years. It’s understandable to be spooked by this volatility after seeing a dull, higher market for so long.
This sell off is a result of very good news
In 2007 through 2009, the U.S. market was rocked by financial collapse. In 2011, the stock market lost 20% when U.S. debt was downgraded by S&P. In 2016, the stock market plunged 12% as China’s stock market was rocked. In 2018, we are experiencing a market drop because…people are making more money? The market started cracking on Friday when the payrolls number reported higher than expected wage growth over the past year. People got nervous that this means higher inflation, and as a result, higher interest rates. Yet, all of these are good things. Could the market really be selling off because the economy is doing too good? Wages are up, companies are making more money than ever, and the tax cuts haven’t even had an impact yet. These are all good things, and higher interest rates are a result of a better economy. For the first time in a long time, we are experiencing a market drop because of good news.
This recent market drop has been swift and deep, but it’s nothing we haven’t seen before. In fact, we see this type of drop just about every year. The market is now down nearly 10% from its high. It is possible that it falls further, and even exceeds the 14% average that we see each year. Still, corporate earnings are strong, wages are growing, and we aren’t entering a recession. Don’t get too nervous about this 10% drop based on news being “too” good.