Tom Sedoric and Casey Snyder

This post was originally published in December 2018 but has been updated with information about recent stock market activity.

Pick any day or a couple of days when markets fall sharply, and one thing is as sure as Newton’s Law of Gravity: fear among investors. When you throw in 24/7 news cycles of social media speculation and news reports lacking historical context, it’s easy to see why a herd mentality of an encroaching panic can set in.

After more than a decade-long historical bull market, market declines and a global economic slowdown have plunged us into recession. While the circumstances surrounding the market drop seem unprecedented, a recession after a decade of growth is not. It’s important to have a battalion of sober minds to counter the anxiety that comes with recent market declines, and to help all of us stay focused on historically based facts when making important investment decisions. As uncertainty lies ahead, we wanted to share some wisdom we’ve read in recent weeks.

Ben Carlson at Ritholtz Wealth Management offered this fundamental perspective on markets:

“Here’s something I can say with 100% certainty—every bear market in the history of U.S. stocks has led to new all-time highs at some point in the future.”

Markets will always seek equilibrium even if investors have a hard time with it. Michael Batnick, the author of Big Mistakes: The Best Investors and their Worst Investments, provided this context: “It’s okay to be uncomfortable, in fact it is guaranteed that over the course of your investing life, you will feel this very same emotion half a dozen times, maybe many more,” he wrote. “You can be worried about lower prices tomorrow and still be confident in higher returns in the future. That should be the default setting right now.”

Although recent weeks have resulted in historic changes in the market’s value, history bears out the theory that market volatility is not exceptional, but the norm. Recent, smaller fluctuations show that the growth we’ve become accustomed to did not occur without some ups and downs. After a buoyant 2017, 2018 was a down year for investments. By any measure, 2017 was phenomenal as all asset classes were at positive performance levels: international markets were up 25% to 30%, domestic equities rose, as did domestic and international bonds.

It was again enjoyable to be an investor in 2019 with nothing but good at play. By comparison, in 2018, every major type of investment fared poorly, delivering flat or modestly negative returns. Emerging market assets that soared 37% in 2017 were down 12% to 16% in 2018, only to surge upward 18% in 2019. Good times often breed complacency and “recency bias” as we come to believe the past can be extrapolated into the future, but by its nature, this type of volatility in the markets is to be expected.

It was a decade ago when the economy crashed like a house of cards and everybody was afraid of something and for a good reason. Nobody knew which big bank would be the next to fall or if the domestic auto industry would survive or if the job loss figures would stop at one million a month. The current climate brought on by global pandemic is not one Americans have experienced in our lives, yet the uneasiness feels similar. Like the events a decade ago, there is uncertainty about what the impact these steep declines in economic activity will have on the market over the next year, five years, or even 10 years. 

The economic recovery that began in June 2009 was the longest in American history. We had virtually full employment, markets had been stable overall, and business confidence had been high. But history tells us that downturns happen when economies are strong, and the fault lines of a downturn are opaque. It is understandable after years of gradual gains that some investors let complacency set in, leaving them emotionally unprepared for this most recent jolt. Naturally, investors may find themselves making investment decisions based on emotion, again leaving themselves vulnerable for what may come next.\

At times like these, it’s worth listening to the blunt reminder of Howard Marks of Oaktree Capital:

Despite all the noise to the contrary, investing is not easy. “Everyone wants to make money. It’s a very competitive activity,” Marks told Barron’s. “But one of the keys is to keep your emotions under control. Everything in the environment conspires to make us do the wrong thing, to buy when things are going well, and prices are high – and to sell when things are going poorly, and prices are lower, which is the exact opposite of what we should do. But it all comes from emotion. We have to resist.”

Which is why psychology and coaching are critical parts of our job: to offer the best of analytical tools and understand the risk tolerances of our clients; to help them mentally and financially prepare for the unknowable by offering reasoned, factual counsel and historical context. In short, to help them resist the temptation of unintentional failure.

This information has been obtained from sources deemed to be reliable but its accuracy and completeness cannot be guaranteed. The views expressed are those of Tom Sedoric – Partner, Executive Managing Director and Wealth Manager and D. Casey Snyder, CFP® - Partner, Senior Vice President and Wealth Manager and are not necessarily those of Raymond James. Steward Partners Global Advisory LLC and The Sedoric Group maintain a separate professional business relationship with, and our registered professionals offer securities through, Raymond James Financial Services, Inc. Member FINRA/SIPC. Investment advisory services offered through Steward Partners Investment Advisory LLC. 2985754