By Deron McCoy, CFA®, CFP®, CAIA, AIF®, Chief Investment Officer
That’s the ‘all caps’ headline the media will use for shock value, hoping to lure you into reading their article or clicking their ad – a shameless attempt to profit off your emotions and fears. But don’t be fooled. The truth is, with the Dow having soared to 27,000, the drop of 1500 points since August 1, 2019 amounts to nothing more than a -5.5% selloff. To put that into context, the daily price moves don’t even rank among the market’s top 100 percentage point declines. Now, if we were back in November of 2008, it would have represented something closer to a -18% drop; a far more significant event. But given the market’s current lofty heights, a certain amount of perspective is required.
Why did the market selloff?
In short, the Dow Jones moved down towards 25,500 because the yield curve inverted (meaning longer-term rates moved lower than shorter-term rates). Why did this act as a spark? Because an inverted yield curve has historically served as a reliable predictor of upcoming recessions. But like anything, the devil is in the details.
The yield curve is made up of many data points ranging from the yield on the 3-month Treasury bill all the way out to a 30-year Treasury bond. String together these various data points and you get a line (typically curve-shaped). An upward sloping yield curve is considered normal – with investors expecting higher returns/yields when they invest/lend for longer periods. An inverted yield curve, however, isn’t normal and suggests future growth will be lower than current growth. Earlier this month, the 10-year and 2-year portions of the yield curve inverted, but not the entire curve. The same thing happened earlier this year, March 8th. Both the 3-month and 10-year portions of the curve inverted causing a similar mini panic in stocks, with the Dow dropping about 600 points over the ensuing couple of days. The market quickly stabilized and subsequently proceeded to climb another 2,000 points (from around 25,450 on March 8th to near 27,539 on July 15th).
Will stocks do the same again? No one has a crystal ball. But remember that although the media thrives on shock and fear, the simple truth is that 3% selloffs happen periodically over the course of nearly every bull market. The Dow Jones dropped 831 points last October and another 1175 points back in February 2018 – and both of those selloffs came when the index was more than 1000 points lower. Volatility is normal. It’s the price investors must pay to reap outsized gains. For some reason, however, many investors (and the media) tend to obsess on the short-term negative rather than looking at things in context. Wise investors, on the other hand, always keep market moves in perspective. While the Dow did incur an 800-point loss on Wednesday, August 14th, it’s nevertheless still up 800 points as of August 23rd from June 3rd!
Market corrections are not only normal but healthy – removing a level of froth that could cause a bubble. Since 1980, the average S&P 500® annual peak-to-trough decline has been around 13.9% but that includes recessionary years. Even in the last 6 years of this bull market, selloffs have averaged 9.82% per year – while markets continued marching to all-time highs. The current 7% selloff, therefore, is nothing more than average and expected.
 JP Morgan
 Morningstar Direct