Happy New Year? Is It Time to Panic Yet?

What a start to the New Year. In the first two weeks of trading, the S&P 500 Index has plummeted 8% on the year. Will next week bring us into correction territory, a 10% decline? Is a bear market (a 20% decline) a possibility? Among those stoking panic is Royal Bank of Scotland analyst Andrew Roberts, who says that the global markets “look similar to 2008.” Actually, they look worse than 2008 if you consider that oil prices have fallen 35% in a year’s time and now hover around $30 a barrel and China, long the workhorse of the global economy, is showing real signs of weakness. And, against that backdrop, the Federal Reserve has begun “liftoff.” After increasing interest rates in December for the first time in nearly a decade, analysts look for the Fed to make as many as four more increases in 2016.

Just as stressful situations in the workplace or in the home demand that we not let our emotions get the better of us, market declines require us to step back, think rationally, and refuse to panic. The popular press, talking heads, and some Wall Street analysts for that matter like nothing better than to try and incite panic. For example, a closer look at Andrew Roberts’ long-term track record shows that he continually predicts disaster. For the better part of six years, he’s been doing the equivalent of yelling “Fire!” in a crowded movie theatre. How wrong has he been? In June 2010, when the markets were about to take off on a remarkable five year boom, he wrote that “We cannot stress enough how strongly we believe that a cliff-edge may be around the corner, for the global banking system (particularly in Europe) and for the global economy. Think the unthinkable.” Again, in July 2012, his analyst report read, in part: “People talk about recovery, but to me we are in a much worse shape than the Great Depression.” And yet, for all his doom and gloom and sound and fury, Roberts failed to predict the 2007-2008 credit crisis and The Great Recession. Go figure.

Frankly, these extreme market comments are often designed to attract the attention of the press. And while these proclamations can make for a good story, they should not serve as the foundation of your investment decisions. Base your financial decisions on facts, not emotions. To that end, while past performance does not guarantee future investment results, reviewing market history can serve to thwart the brewing panic. Since 1950, the U.S. markets have experienced a decline of between 5% and 10% (the territory we’re in already) in 35.5% of all calendar years. Approximately one in five years (22.6%) have experienced drawdowns of 10-15%. And 17.7% of our last 56 stock market years have seen downturns, at some point in the year, above 20%.

What’s the cause of these downturns? Stocks periodically go on sale because people panic and sell them at a loss as the market tumbles because they fear losing more. That behavior goes against the cardinal rule of investing — buy low and sell high. So, today, while some investors are panicking and bailing out of the market, others see recent declines as a buying opportunity. Has the market hit rock bottom? Should you move off the sidelines if you are sitting in cash? Of course, nobody knows the future. But, we do know that every one of the declines referenced above eventually were followed by a healthy rebound.

With that in mind, what is our advice to our clients? Remain disciplined, stick to your investment plan, look at this as a buying opportunity, continue to invest on a systematic basis, invest excess cash, and decline to participate in the panic.

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