We are pleased to share with you a message by Ken Solow, Founding Partner and Chairman of the Investment Committee at Pinnacle Advisory Group. Many of you met Ken at our client event in July. Since almost all of our clients are now in Pinnacle’s investment models, we thought that you might like to read his thoughts on the recent stock market decline. As always, please call us if you have any comments or questions.
The S&P 500 Index is down over 12% from its high last May, which qualifies as a market correction but not a bear market. In fact, it’s been quite a while since we experienced our last bear, although it may not feel that way. From April to October of 2011, the stock market declined by 19.39% on a closing basis. While experts can debate whether this meets the definition of a bear market (which are typically defined as 20% declines), those who remember it will recall how scary it was. By the time the market bottomed in October, many were recalling the 2007–2009 bear market, which was gut wrenching for everyone. During that excruciating market decline, the S&P 500 Index fell by 55% and the economy tumbled into a deep recession. It is only in hindsight that we can see that both the market bottom in 2009 and the October low in 2011 marked important market bottoms. Since October of 2011, the S&P 500 Index rallied 94% to its eventual high set in May of last year.
Since the last mini-bear, we’ve experienced several market declines that offered their own opportunity for intestinal distress. Here’s a quick list:
April to June 2012: -9.9%.
September to November 2012: -7.6%.
May to June 2013: -6%
Jan to February 2014: -6%
September to October 2014: -7.4%.
Which brings us to last year’s 12.25% decline from July to August and the latest 8.5% market decline measured from the beginning of this year to yesterday (January 21st). The best investors can process these short bursts of market volatility without much emotion, though it’s hard to do. Bear markets are frightening, and nowadays smaller market corrections can be just as scary, because we think of them as a possible precursor to disastrous bear markets. In the short run, maybe the best we can do is acknowledge our feelings and hope that our logical left brain can take over while our emotional right brain is anxious.
Here are a few thoughts to help you sleep a little bit better while the news seems to be filled with “China did this,” “Interest rates did that,” ”Geopolitics are a mess,” ”Presidential candidates said that,” and “The stock market suffered another decline.”
- Pinnacle clients choose investment policies that make sense based on their long-term financial plan. Very few of them experience portfolio volatility even close to the market volatility they read about when pundits discuss “the stock market,” and most clients have a diversified portfolio that defends against market risk.
- The Pinnacle investment process is designed to evaluate market risk at all times and gives the investment team the flexibility to reduce portfolio risk so that our managed portfolios can be even less volatile than your portfolio policy. A balanced portfolio is less volatile than the market, and Pinnacle’s Prime Series portfolios can be even less volatile than the balanced portfolio benchmark because of the way we manage for risk. Pinnacle’s investment team has correctly evaluated current market conditions and Pinnacle portfolios are now experiencing less volatility than both the broad market and our benchmark portfolios. At the moment, this means that in a falling market, you’re getting a double bang for your buck.
- Rick Vollaro and the rest of Pinnacle’s investment team is very experienced. They have worked together as a team for a long time and have managed money through a variety of market conditions, including many market corrections and two major bear markets. They are working hard to properly assess possible risks and opportunities.
- Understanding that portfolio volatility is a normal component in long-term investing may help reduce the inevitable stress you feel when checking your portfolio statements in a bear market. As portfolio values decline in a bear market your Wealth Manager can help you better understand the impact of lower values in your financial plan. Your Wealth Manager knows you very well, understands your concerns, and would be pleased to discuss how the news and recent volatility impacts your portfolio. Feel free to call your Wealth Manager to discuss any portfolio related anxiety you’re feeling.
Experts disagree if recent market declines are the precursor to a new bear market. I will leave it to Pinnacle’s investment team to opine on how severe the drawdown might be. At the moment, it’s important to understand that market volatility is part of the sometimes ugly process of taking risk with capital — without it, it wouldn’t be possible to beat inflation and achieve your financial goals over time.