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Why Does This Market Decline Feels So Much Worse?

| May 03, 2022
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In today's episode Nicholas Olesen, CFP®, CPWA® shares why this 10% pullback in the stock market feels so much worse and that data that validates those feelings.

"How is the market only down 10%?" is a common question in recent conversations with investors and we believe it's a very fair feeling. Rather than just respond with, that's a normal pullback or it'll come back, we thought it would be more helpful to dive into the underlying reasons this feeling makes sense. Here's the three main reasons we expand on:

  • Stocks and bonds are both down more than 10% so far this year, the largest joint drawdown since the late 1970's.
  • The drawdown has been much, much worse for many stocks
  • The largest and most commonly owned companies have also pulled back more

You can see the charts referenced below.

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Please send us feedback and any topic or questions you would like us to cover.  Email us at: nolesen@kathmere.com 

Charts referenced in today's show:

Summary of today's show:

“How is the stock market only down 10%?” asked a client in a recent meeting when we were reviewing the performance of a variety of market indexes. “It feels like it’s down so much more than that” they continued. This client’s question echoed a general sentiment we’ve heard from others about the current market environment. As such, we thought it would be valuable to share a few thoughts.

We all know from experience that markets generally move higher over the long run as a byproduct of capitalism at work but that they are also prone to inevitable downturns. We also know that when markets are experiencing these periodic moves lower, it’s generally an unpleasant experience to see our portfolio’s decline in value. That being said, we believe there are three reasons why the current environment likely feels worse than past 10% pullbacks in the stock market.

First, and in our opinion most importantly, this time both stocks and bonds are down more than 10%. The chart below shows the drawdowns from all-time highs for U.S. large-cap stocks (represented by SDPR S&P 500 ETF Trust; SPY) and the broad U.S. investment grade bond market (represented by the iShares Core US Aggregate Bond ETF; AGG) over the last 10-years. As you can see, in the recent pasts, when stocks experienced a noticeable pullback, bonds typically held up quite well, providing some welcome ballast to diversified portfolios. Currently, the overall bond market is experiencing a drawdown that’s immaterially different than that of the stock market. 

As we have communicated over time, our approach for investing in the bond market, since early 2020, has been to hold only strategies focused on short maturity bonds in order to limit downside sensitivity to rising interest rates. While this approach has greatly benefited during this time, the general feeling of the bond market drawdown is nonetheless understandable.

Second, this pullback may feel worse since there are many stocks that are down more considerably more than the overall market index. This dynamic is most readily observable in the widely followed, tech-heavy NASDAQ, where almost half of the companies in the index are down 50% or greater and more than 20% the stock are down 75% or more. Those are significant drawdowns. The chart below highlights these figures though time since 1999.

Lastly, we believe the current environment likely feels worse than it really is because many of the largest, most prominent and recognizable companies in the market have sold off by more than the market as a whole in recent weeks. The chart below reveals the performance of the 10 largest stocks in the S&P 500 Index during the month of April. As you can see, nine of the 10 saw their price decline by more than SPY’s decline of nearly 9%. These are not small moves for such large companies and amount to losses measured in trillions of dollars.

Once again, our approach for allocating to public equities has generally been underweight (relative to traditional indexes) all of these names given our evidence-based approach to portfolio management whereby we strategically tilt stock portfolios toward strategies that that individually favor stocks that are: (a) inexpensive relative to fundamentals, (b) have healthy balance sheets and high profitability and (c) exhibit a positive price trend relative to other stocks.

We hope this helps to bring clarity to why you or others may be feeling that the markets are doing so poorly, even if they are "only" down 10% or so.

As always, please do not hesitate to reach out with any questions or thoughts you have.

 

 

 

This is prepared for informational purposes only. It does not address specific investment objectives, or the financial situation and the particular needs of any person who may receive this report.

An index is an unmanaged portfolio of specific securities, the performance of which is often used as a benchmark in judging the relative performance of certain asset classes. Investors cannot invest directly in an index. An index does not charge management fees or brokerage expenses, and no such fees or expenses were deducted from the performance shown.

SPDR S&P 500 ETF (SPY) -  an exchange-traded fund (ETF) that tracks the Standard & Poor's 500 (S&P 500) index. It does this by holding a portfolio of stocks in companies that are included in the S&P 500.

iShares Core U.S. Aggregate Bond ETF - seeks to track the investment results of an index composed of the total U.S. investment-grade bond market.

NASDAQ Composite Index - a market-weighted index of all over-the-counter common stocks traded on the National Association of Securities Dealers Automated Quotation System.

 

Drawdown - is the peak-to-trough decline during a specific record period of an investment, fund or commodity. A drawdown is usually quoted as the percentage between the peak and the trough.

 

The information herein was obtained from various sources. Kathmere does not guarantee the accuracy or completeness of information provided by third parties. The information in this report is given as of the date indicated and believed to be reliable. Kathmere assumes no obligation to update this information, or to advise on further developments relating to it.

 

 

 

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