The following is a lightly edited version of a letter sent to FutureSafe clients on February 27 2020. It is reproduced here in the hope that it might be helpful and of interest to the broader investing community. Please note that the information contained herein might be outdated. As always, please consult your advisor or an investment professional before making any investment decisions. This information is provided purely for educational and informational purposes, and please remember that all investments carry risk which might cause you to lose some or all of your investment.
There’s a pretty good chance you’ve noticed that the stock market dropped around 10% over the past few days.
If you didn’t know that happened, Congratulations, you have what it takes to be a great investor
If you did know that happened and it still didn’t bother you, Congratulations, you have what it takes to be a great investor
OK, so what exactly happened?
The Dow Jones has fallen around 3200 points over the past 4 days including nearly 1200 points (around 4%) today. Other indices, same story. As I write this on Thursday evening, the Dow Futures are looking mildly positive, suggesting a better opening tomorrow morning.
So, are we in a Bear Market?
The drop from the recent market top is just over 10% which is the magic number that market pundits call a market correction. So, just so you know, we are now officially in a market correction. If the drop increases to 20% or greater, it’s called a bear market, and is no longer classified as a market correction, so no, we are not (yet) in a Bear Market.
Why did this drop happen?
Well, that is of course, the subject of duelling “expert opinions”. Explanations range from “a much needed correction after the spectacular rise in markets over the past few years” to “the corona virus will slow the economy and lower company profits” while some have even linked it to Bernie Sanders’s improving presidential prospects. Which is it? It’s virtually impossible to say, but it’s pretty undeniable that this is a significant event.
OK, so I found two charts that I found on CNBC that I thought were interesting and some of you might like. The first chart is from Bloomberg and Deutsche Bank Research, and shows how long it took for a 10% drop in the S&P500. Fun factoid: this is the quickest 10% drop in the history of the S&P500.
This second chart is also from CNBC (and Goldman Sachs). Remember I told you that we are now officially in a market correction but not yet a bear market?
Well, it turns out that this is the 27th such post-war market correction. How bad could it get? Will it turn from a market correction to a bear market? No one can possibly predict that, but here is how bad those other 26 got (reminder, these are all the market corrections that did not turn into bear markets):
Even after today’s drop, amongst all of our accounts, the account with the tightest risk cushion would need to fall another 15% before it triggers an adjustment. That’s because the engine looks at your account value plus any interest you could get from Treasury Bonds and then decides whether the risk of ending up below your Safety Net is significant.
So, here’s your take away: while this might feel like a big drop, it’s well within the parameters that are “normal” and if you have set your Safety Net, your risk is being automatically managed by the engine.
I’ll see what happens tomorrow and the next couple of days and I’ll send out another quick note if I think you might find it useful.
In the meanwhile, please do reply to this email and let me know if you would like to see more market notes like this, or if you would rather see less frequent updates.
As always, if you have any questions, please do not hesitate to email or call me.