“I spend about half my time wondering why I have so much in stocks and about half wondering why I have so little”
Jack Bogle, founder of Vanguard Group
Jack is 89 years old.
With the US markets closed today in honour of George H.W. Bush, I had a bit of time to think and reflect.
On Tuesday, the Dow Jones was down 799 points. That’s a big number. In fact it was the 4th largest point decline in history, but as a percentage loss of 3.1%, it ranked as the 333rd largest percent decline in history (Bespoke Investment).
In addition, to emphasize the message, on Dec. 3rd the Dow Jones traded within 20 points of 26,000, and yesterday (Dec. 4th) it traded within 20 points of 25,000. Almost a 1000 point range in less than 24 hours.
In fact, looking back, here are recent years with their respective number of 2% drops on the S&P 500:
| Year | 2% or greater drops | Year | 2% or greater drops |
| 2004 | 0 | 2012 | 3 |
| 2005 | 0 | 2013 | 2 |
| 2006 | 0 | 2014 | 4 |
| 2007 | 11 | 2015 | 6 |
| 2008 | 41 | 2016 | 5 |
| 2009 | 28 | 2017 | 0 |
| 2010 | 10 | 2018 (YTD) | 11 |
| 2011 | 21 |
| |
So if it feels like things are a little choppy and creating some “agita” amongst investors, it’s because we haven’t seen it in 7 years. Last year, not a day of being 2% down. What also really stands out is how bad 2008 and 2009 really were.
There are a lot of reasons being blamed and the concerns have been many. Of the concerns, some have been out there for quite some time:
- China/ US Trade - Brexit
- Tariffs - Italian debt
- Rising interest rates - Trump admin policies
- US government shutdown - Energy price volatility
But yesterday the main excuse I heard was an “inverted yield curve”. If I had a nickel for every time I heard or read that last night… I could be having a real decent lunch instead of sitting at my desk writing this!
An “inverted yield curve” is when short term rates rise so much that they are higher than long term rates. A “normal” yield curve has higher rates the longer you go out and looks like this:
An “inverted” yield curve looks like this:
The reason an inverted curve spooks so many people is because it usually means the economy is going into recession. What the talking heads don’t mention is that on average, a yield curve inversion usually appears 8 months before a stock market peak and precedes an economic recession by 14 months. This signal is 9 for 9 going back to the 1950’s.
So while we have not totally “inverted” yet, it is very close.
If that’s the case, history tells us we still have a ways to go.
So I think we need to get used to rising volatility, because that is typical of late cycle markets. It’s never fun, but it’s the price of admission for higher long term returns.
Stay tuned,
Vito Finucci, B.COMM, CIM, FCSI
Vice President and Director, Portfolio Manager
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