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Q3 2021 PastCast: Traffic Ahead

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Here’s all you need to know. (If you’re in a rush.)

  • On the COVID front, Summer 2021 became defined by a scary new variant known as Delta.
  • Regional reinstitution of mask mandates, plateauing vaccination rates, store closings, event cancellations, and fear of a step backward in the pandemic, led to an unexpected slowing pace of growth for our economic recovery.
  • Major US stock indexes achieved several new all-time highs in the quarter, before a sustained decline that began in September.
  • Prior to the final week of September, the S&P 500 had gone 227 trading days without declining at least 5% from a recent high, rising nearly 30% over that period. But, that streak ended on the final day of trading for the quarter (9/30).
  • Political uncertainty returned as yet another ominous debt-ceiling deadline looms and the fate of the $3.5 trillion Infrastructure bill remains in the hands of gridlocked D.C. lawmakers.

And now for the long(er) version…

With the arrival of the Fall season, we now find ourselves in the home stretch of a year that began with an overflowing sense of optimism in the US, at least in terms of moving beyond the pandemic. Although the summer began as a party for so many parts of the country, we were quickly reminded just how dangerous declaring victory over a virus like COVID-19 prematurely can be.

A new variant known as the “delta” variant became the dominant strain of the virus in the US during the third quarter. Areas of the country with a relatively high unvaccinated population saw the largest spikes in hospitalizations, which stretched the healthcare system to its breaking point, once again.

As hospitals overflowed with new COVID patients and a new school year began, many areas of the country were forced to introduce/reintroduce masking and mandatory vaccination measures to mitigate the damage. As you’d expect, the uncertainty caused by a brand new, even more contagious variant of the virus, brought an unwelcome intermission in the recovery party.

Despite all the negative headlines surrounding the delta variant, as a whole, the US stock market seemed to hold up quite nicely and look past it all for the most part, although specific sectors tied to the recovery did begin to see pullbacks. In fact, the S&P 500 reached an all-time high for the 52nd time in 2021, in early September.

With US stocks up 15% on the year (so far), it’s important to remember that it is nearly double the average annual return for stocks since 1928. We’ve all become a bit spoiled in this hot market, which has likely managed to also taint your expectations for returns going forward. It’s understandable. But these streaks do come to an end at some point, and markets tend to search for reasons to sell-off in times like these. (Enter DC politics)


Gridlock in Washington

Fall has historically been a time when politics takeover the headlines and tend to make investors a bit nervous and uncertain. And the beginning of this Fall has followed that pattern to a tee. On this year’s menu is the debt-ceiling debate (here we go again) and a proposed $3.5 trillion partisan infrastructure bill.

Let’s start with the debt ceiling. We’ve been here before. And while we say it every time, politics have become so toxic and polarizing in the U.S. that every time we have this debate, it feels more and more likely the divisions will win out and the US will default on its debt payments for the first time in history.

A quick reminder – the debt ceiling is a self-imposed limit on the government’s ability to service the national debt. Congress plays this game every few years and the most notable example of this debate impacting the investment world was back in 2011, when we came so close to defaulting that the country’s credit rating was actually downgraded, causing a global correction in financial markets.

The reality is that the consequences of a US default could be so severe (at least in the short term), that despite all the political rhetoric, in the end a deal is likely to get done. There are risks in taking the debate once again into the 11th hour, but the risks of getting nothing done are far worse.

And then we have a massive Infrastructure bill that, while likely to still pass narrowly along party lines, has short-term investors in a state of limbo – not knowing what to expect in the coming months.

Investors are understandably nervous and comments by experts and politicians in recent weeks have given many investors the reason they’ve been looking for to sell stocks, explaining the increasing number of headlines featuring the terms “sell-off” and “correction”.


Correction, you say?!

If you pay any attention to financial media, you’ll notice the term “correction” gets thrown around quite a bit. And even the mainstream media joined the fun in the month of September, as US stocks hit a bit of a bump in the road and the headlines ran with the standard fear-based campaign to drive clicks and grab attention.

When all was said and done, the S&P 500 ended the quarter having fallen just over 5% from its recent high to start September, marking the first drawdown of at least 5% for the S&P 500 in 227 trading days¹. BUT, if we zoom out a bit, the S&P 500 kicked off Q4 of 2021 up around 15% so far on the year. Zoom out even further and nearly 27% over the past 12 months². Perspective is key.

(CNN Money: S&P 500 10/4/2020 – 10/4/2021)

Given the trauma investors have experienced during major market events like the unprecedented crash caused by the initial COVID lockdowns in the Spring of 2020, every daily decline since seems to bring out a chorus of pundits predicting the next “crash”.

So, what exactly is a correction and why does it seem to scare investors away from stocks? And maybe more importantly, what should YOU be thinking about when markets take a turn south after such a long uninterrupted period of gains, like we’ve experienced over the last year?

The textbook definition of a stock market correction is a pullback of at least 10% from recent highs. Based on that definition, despite the fact that you’re likely hearing about a correction in the news, we’re only halfway there at the time of writing this. And it’s taken nearly a month of mostly minor daily declines to reach this point. This is a far cry from the dramatic crash we experienced last March, when many stocks lost half their value in a matter of days.

True corrections (declines of 10% or more) actually have occurred about once per year since 1928. And the average correction in the S&P 500 was -23% in that time. The S&P 500 has also fallen by 20% or more about once every 4.5 years, and 30% or more about once every 7 years³.

So, we remind you of all this to say that these things should be expected fairly often and the fact that it’s been so long since we’ve even come close to a true correction in US stocks is actually the exception, not the rule. What’s impossible to know with any degree of certainty is the timing (or the reason) of the next correction. But maybe the most important fact to remember is that despite corrections being so frequent throughout history, here we sit today, just 5% below all-time highs in stocks.

Here’s another perspective…

(Chart by Google: S&P 500 All-time)

Despite declining 20% or more 21 separate times in its history, the S&P 500 has managed to recover following every single drop it has ever experienced. The reasons for each correction are different and unpredictable in their own ways, the results have been as predictable as it gets – crashes (and corrections) end in recoveries. The trick is staying the course and turning your natural instincts of fear to your advantage.

The bottom line

We aren’t actually in a correction, but we certainly could be by the time you’re reading this. And if we are, that would be completely normal. And if it’s normal, it’s something you should get used to. And if you come to expect the declines, you should also learn to embrace them.

Our natural instinct is to feel concern or fear when it comes to the value of our investments declining. But without the declines, investors don’t get rewarded with the superior returns that stocks have provided to those with patience and a disciplined approach to markets. This is especially true for investors contributing on a regular basis to their investment accounts, particularly through payroll deduction to their 401k or 403b. 

For those with decades left before planning to retire, the last thing you should want is for stock prices to rise without interruption, since every contribution you make buys fewer and fewer shares in that scenario. If you learn to welcome the market’s natural volatility, rather than run from it, you won’t only give yourself some peace-of-mind, you will have achieved what very few investors are able to. Yes, even the professionals.

And for those close to or even IN retirement already, remember that retirement isn’t the finish line for you. Ideally, you still have decades of retirement to enjoy and your ability to live the lifestyle you want is likely to require some continued exposure to riskier assets like stocks, at least in one bucket of your overall portfolio.

If you’re feeling anxious about your retirement accounts or questioning your strategy for any reason, lean on us. Our team is here to help walk you through your strategy and help you tune out the noise and focus on what’s important for YOUR goals.

The information is provided for discussion purposes only and should not be considered as advice for your investments. Past performance is no guarantee of future results. Please consult an investment advisor before you invest.

¹ Source: https://www.marketwatch.com/story/a-bullish-u-s-stock-market-streak-is-snapped-thursday-after-227-trading-days-11633037122
² Through 10/4/2021; Source: CNN Money
³ Source: https://awealthofcommonsense.com/2021/09/the-consequences-of-a-market-correction/

Published on October 7, 2021