There’s been a fair amount of hysteria in the financial media of late about the markets in general which appears to have crescendoed yesterday as the Dow shed more than 800 points.
In this brief commentary we share three key points that we think investors would be well served to consider:
Points are not percentages
Point moves in markets (especially the Dow) should not be the barometer for whether the market went up or down a large amount. While an 800-point drop is certainly nothing trivial, it’s important to recognize that it only amounted to a loss of slightly more than 3%—a move which has historically happened about two times per year. As the markets have gone up over time, these point values become increasingly less significant. For instance, keep in mind that in early 2009 at the market’s trough, a comparably-sized a 3% decline move in the Dow would have amounted to less than 200 points. Lesson: the percentage is what matters.
The yield curve isn’t everything
This is something we’ve written about on a few occasions. For instance, see here and here. The upshot: while a yield curve inversion has occurred prior to each of the last seven recessions since 1970, its usefulness as a timing tool is quite limited as the time from inversion to the start of the subsequent recession has varied significantly as has the performance of the stock market (which has incidentally been, on average, positive from the inversion to the start of the recession). Something else that hasn’t garnered quite as much attention in the headlines: some well-respected economists, such as former Fed Chairperson Janet Yellen, have stated that they believe the yield curve may not be as reliable of a signal these days. See here, for example.
Trade tensions are nothing new
Trade conversations have caused ups and downs in the market for nearly 12-18 months now. This is nothing new. How will the ongoing trade disputes between the U.S. and much of the rest of the world play out? How significantly will these developments impact the real economy and the real companies? How will the markets react? No one really knows for sure. Serious, prudent investors don’t look to make significant portfolio moves based on predictions about trade policy.
As always, please reach out with any questions or if you would like to talk about your personal situation and investments.