February 15, 2019

Fourth Quarter Litmus Test

stock market graph

Did You Know?

It took just 66 trading sessions for the S&P 500 to fall 19.8% from 9/20 – 12/24.

It took just 36 trading sessions heading into President’s Day weekend for stocks to rise 18%.


December was a brutal month for stocks. With the S&P 500 falling 19.8% from the end of September to the close on Christmas Eve, it felt as though the 3% and 4% down days would never end. Volatility was driven by signs of a global economic slowdown, political dysfunction, and concerns about monetary policy. This instability caused many investors to flee the market toward the end of the year.

However, heading into President’s Day weekend, the S&P 500 rallied more than 18% off the Christmas Eve lows. It’s safe to assume that this relief rally has made investors feel good about things again but that’s certainly not how it could’ve played out:

  • Stocks could have dropped even further. After falling 19.8% the S&P 500 could have continued to fall through the end of the year, plunging beyond the official -20% mark that signals a bear market.
  • Stocks could have flatlined indefinitely. With such a swift fall followed by little to no movement, investors might have been even more confused about whether to buy, sell, or sit on their hands. Often times this can leave us anxious to do something, anything, to make something happen.

Fortunately, we didn’t have to deal with stocks declining further or flatlining. After reaching the low on Christmas Eve, stocks took a sharp turn resulting in a nice V shape we all hope to see. Even though we didn’t have to contend with the other two outcomes this time, we will eventually. We won’t always get a friendly rebound that calms our lingering fears. And while it’s comforting for now, it’s unlikely that we’ll see another scenario where stocks free-fall and then march back up almost as fast as they came down.

This is why it’s important to always be mindful of your personal risk tolerance. Risk tolerance measures how you feel about risk and moves in the market. The fourth quarter of 2018 served as a good litmus test to see if you really behaved the way you thought you would during market turbulence. If there were certain asset classes that made you severely uncomfortable, now is the time to reassess how much risk you’re actually willing to take on. Risk tolerance is easier to define on paper while the market is advancing and the economy is humming along but it’s an entirely different ballgame once things start going haywire.

The best time to consider your tolerance for risk is when there is none. It’s against human nature to do so but it’s an important step for any investor. If stocks are falling and you’re beginning to reassess your risk tolerance, it’s already too late. By then the most likely outcome is an overreaction and making bad decisions during bad markets can be destructive to a portfolio.

While it’s uncertain where markets are headed from here, it’s clear that volatility is back and here to stay. An example of how hard it is to predict where we go from here is this:

  • It took just 66 trading sessions for the S&P 500 to fall 19.8% from 9/20 – 12/24.
  • It took just 36 trading sessions heading into President’s Day weekend for stocks to rise 18%.

Think about how you’re going to survive the next bear market now. Think about it while you’re feeling good about yourself and things happening around you. The fourth quarter of last year was a temperature check for all of us. We’re all thankful for the rebound in stocks but it’s important to stay mindful and remain on your toes for future potential outcomes.

From the desk of Courtney Stutts

 

Required Disclosures:
Registered representative offering securities through Cetera Advisor Networks LLC, member FINRA/SIPC. Carroll Financial and Cetera Advisor Networks are not affiliated.

Additional risks are associated with international investing, such as currency fluctuations, political and economic stability, and differences in accounting standards. Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested in directly. The views are those of Jonathan S. Liles and Courtney M. Stutts and should not be construed as investment advice. All information is believed to be from reliable sources: however, we make no representation as to its completeness or accuracy. All economic and performance information is historical and not indicative of future results. Consult your financial advisor for more information.

The S&P 500 Index is a capitalization-weighted index made up of 500 widely held large-cap U.S. stocks in the Industrials, Transportation, Utilities and Financial sectors.

Historical data derived from Koyfin.com.

Investing & Saving, Market Update, Market Volatility

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