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  • Stephen Mulholland, CFA

The Market Had the Fastest Correction in History: Now What?

Dear Client,


Last week the market woke up to the risk posed by the Corona Virus. The S&P 500 experienced the fastest stock market correction in history; which is technically defined as a 10% drop from a previous all-time high. The rout really began on Sunday February 23rd as Asian Markets sold off strongly, including South Korea, which has been heavily impacted by the virus, but also responding in impressive fashion to contain it. The contraction lasted throughout the week and the S&P 500 closed the week down -12.5%. Over the weekend and into Monday the US Federal Reserve and central banks around the world pledged support for the markets and they recovered some of the week’s previous losses on Monday. To put the quick downturn in perspective, the market had just reached a new all-time high on Valentine’s Day, and after the precipitous drop the following week, it remained equal to its value from Mid-October. In fact, on February 14th, the S&P had hit its highest P/E ratio as reported by FactSet of 19.0 since 2002. As the name implies, this was a “correction” indeed.

What should you do now? If you have re-calibrated your investment plan with us in the past year, the answer is nothing. A 12% correction off an expensive market after a historic bull market does not create a buying opportunity in of itself. In this case, sticking to your plan is the best advice.


If you have not re-set your investment plan in the past 3 years, then our advice would be to do so as the market receives additional support and takes a reprieve from the relentless losses of last week. While stocks historically were the best performing class in the United States and around the world, they did better than average over the past decade: generating 14% per year instead of their normal 10%.

While this should rationally lead to lower expectations for the next 10 years, periods of excellent performance often lead us to extrapolate that better than average results are here to stay. If the last ten years have treated you particularly well in the form of stock returns, a windfall on a real estate sale, or outsized gains from company stock, now is a good time to make some of your gains real and reduce your exposure to risk.


As always, we are available and happy to review your portfolio or make any necessary adjustments at any time. While it is good advice to remain calm and not panic, that is often easier said than done. We believe everyone should use last week’s episode as a reminder that the past 10 years were an aberration and not likely to repeat. And, appropriately prepare for the next decade.


Please feel free to call or email us with any thoughts, questions or concerns.


Sincerely,


Stephen & Mark


“Nobody knows the real significance of the recent events in the financial world, or what the future holds,” Howard Marks


“The sense of security more frequently springs from habit than from conviction, and for this reason it often subsists after such a change in the conditions as might have been expected to suggest alarm. The lapse of time during which a given event has not happened, is, in this logic of habit, constantly alleged as a reason why the event should never happen, even when the lapse of time is precisely the added condition which makes the event imminent,” George Eliot, Silas Marner

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