It’s been a challenging couple of months for investors as the market correction that began in early October continues to drag on. Attached is an update from RBC Wealth Management providing our view on the health of the economy and outlining why we believe that this is just yet another correction within a longer-term bull market. In summary:
Our forecast is for the U.S. economy to grow 2.5% in 2019, which is slower than the ‘tax-cut juiced’ growth rates we saw earlier this year (Q2 growth came in at 4.2% and Q3 growth came in at 3.5%) but still better than the 2.2% average annual growth rate that has prevailed from the end of the 2009 recession to the beginning of this year.
The IMF recently trimmed its growth forecasts somewhat but is still expecting global growth to average 3.7% next year. The IMF expects Asia to grow at 5.4% in 2019.
Credit conditions and employment numbers remain very favorable, and nearly every major leading economic indicator continues to show that the U.S. economy is still in expansion mode.
Also attached is a chart on market corrections over the last 30 years and it illustrates the size of the largest drop in each calendar year. Key takeaways are as follows:
The stock market goes through difficult periods every year. Some years the dips have been as small as 3% and some years it’s much larger.
The timing of these corrections is completely unpredictable, making them absolutely unavoidable if you have exposure to stocks in your portfolio.
The average size of each market correction over the past 30 years is 14%. Since October 1st the markets are down almost 15%, making this recent drop just about average relative to what’s been experienced by investors every year over the past 30 years. That said, it is really rare to have to suffer through 2 full corrections (drops of 10% or more) in a calendar year like we have had to endure this year. But volatility is back and we have to live with it and as much as reasonable, take advantage of it!
I spend a fair bit of time discussing the psychology of investing as I find it a fascinating topic as investor behavior is more important than economic cycles. Many will remember the “Greed/Buy, Fear/Sell….repeat until broke” chart that I keep on my desk! Left to one’s own emotions, most investors seem to want to buy high and sell low when they know that doesn’t work in any other facet of their lives. Many studies have proven that emotions get in the way of successful investing. The idea of stepping out of falling markets and buying back cheaper is a seductive concept that is impossible to implement. Corrections are just the cost of entry to the long term benefits of capital markets.
I am well aware that this has been a challenging year and sometimes the daily news can seem overwhelmingly negative. Good news is ignored and bad news is recycled. “Come back after the break and find out why this expert says things will get worse before they get better!”…..
Having lived through the vast majority of those market corrections over the last 30 years I also know that the best way to ensure a positive outcome is to trust the process and focus on our long-term discipline and strategy.
Please call if you would like to discuss your portfolio. If we don’t speak I hope you and your family have a very happy and healthy holiday season and wish you all the best for 2019!