The Return of Volatility
After a relatively quiet summer for the markets, this October has been a return to more normal levels of volatility for stocks. Meanwhile, the bond market has been steadily losing ground throughout the year. The Federal Reserve has maintained a steady pace for raising interest rates at one hike per quarter for the last eighteen months. As the Fed tightens monetary policy, investors and consumers have continued to enjoy the stimulus from the tax cut that was passed at the end of last year. However, the Trump administration’s aggressive trade policy has introduced a fiscal drag through tariffs and a higher level of uncertainty for corporate managers. Throughout the summer, markets were able to mostly ignore these crosswinds. That came to an end in October.
As a long-term investor, it is critical to remember that investor psychology is the primary driving force for the market in the short term, while fundamental economic realities drive long-term returns. Today, the fundamental economic reality for the U.S. economy includes an unemployment rate at an historic low, contained inflation, and corporate profitability at an historic high. Investors may be concerned about the sustainability of all these trends, as well they should. The fact remains that there are no signs that these trends are about to come to an end. Moreover, attempting to time the market around these trends will almost inevitably come with high costs.
Darkest before the Dawn
Market corrections are always uncomfortable for the simple fact that no one likes to see their account balances retreat in value. Investors tolerate discomfort and uncertainty because they hope to participate in the gains that the market has historically provided. Many investors hope to limit their discomfort by jumping out of the market when they feel the risk is too high. When this is done the investor may be (at best) correct in avoiding a market down turn, but they become responsible for timing market bounce. Most simply can’t. The bar chart below illustrates the cost of missing the best days in the market. It is striking to note that missing the 10 best days in the market between 1998 and 2017 would have cut the long-term return of your investment in half.
Additionally, it is crucial to remember that over time, investments in the markets have historically skewed toward positive returns as illustrated in the below chart.
Prepare for the Storm while the Sun is Shining
Prudence dictates that we prepare for the unforeseen before it occurs rather than being forced to react when we are already in an uncomfortable position. Financially, what that means to us, at Cornerstone Advisory, is that we ensure that we review our respective investment policy statements with our clients, as well as their financial plan on an ongoing and regular basis. Knowing that we have the financial resources and strategy to navigate challenging markets and economic times is key to sustaining ourselves, but also to positioning ourselves to take advantage of opportunity. Market volatility is all too often referred to as “market risk”. Looked at through the perspective of the prepared, it can also be considered an opportunity.
As always, if you have any questions or would like to have a conversation, please reach out to us or your portfolio manager.
The Cornerstone Team
Disclosure: Cornerstone Advisory, LLC, is registered as an investment adviser with the SEC. The firm only transacts business in states where it is properly registered, or is excluded or exempted from registration requirements. Registration does not constitute an endorsement of the firm by the Commission nor does it indicate that the adviser has attained a particular level of skill or ability. Past performance may not be indicative of future results. Therefore, no current or prospective client should assume that the future performance of any specific investment or strategy will be profitable or equal to past performance levels. All investment strategies have the potential for profit or loss. Changes in investment strategies, contributions or withdrawals, and economic conditions may materially alter the performance of your portfolio.