Whenever stock prices experience large short-term declines, we make sure to check in with you to put the declines in perspective. The chart at the bottom of this memo provides figures that should help.
- The media likes to present large numbers in its reporting, but the focus should always be on percentages. Using end of January 2018 price levels, a 1,000 point decline in the Dow is less than 4%. This is comparable to a stock you own going from 100 to 96, a change you might not notice that much.
- Since the end of 2014, there have been two periods (August 2015 and Jan-Feb. 2016) of declines of 12%, which would be 3,000 points using the end of January 2018 price levels. Do you even remember those periods?
- Stock prices have had very large gains since the 2016 election, up approximately 7,800 points to the end of January 2018, which was a 42% gain since the election. Even with the declines of the last two weeks, stock prices are close to year-end 2017 levels.
- Some kind of stock price correction has been anticipated for many months now, as prices kept going higher. How much stock prices are likely to decline, and for how long, is of course in the realm of the unknown, although the media and the financial community will certainly provide their guesses.
- Note that stock prices have gone up in periods of both increases and declines in 10-year Treasury yields. These yields have increased significantly since the end of 2017.
Stock Index % Changes, and US Treasury % Changes
End 2014 to Feb 5, 2018 (Using end 2014 as base year)
| DJ Indus | S&P 500 | NASDAQ | 10 yr USTr | ||||
| End 2014 | 17,823 | 2,059 | 4,736 | 2.17% | |||
| Aug 2015 | 15,666 | -12.1% | 1,868 | -9.3% | 4,506 | -4.9% | 2.08% |
| End 2015 | 17,425 | -2.2% | 2,044 | -0.7% | 5,007 | 5.7% | 2.27% |
| Jan-Feb 2016 | 15,660 | -12.1% | 1,829 | -11.2% | 4.267 | -9.9% | 1.64% |
| Election Nov 2016 | 18,333 | 2.9% | 2,140 | 3.9% | 5,193 | 9.6% | 1.86% |
| End 2016 | 19,763 | 10.9% | 2,239 | 8.7% | 5,383 | 13.7% | 2.45% |
| End 2017 | 24,719 | 38.7% | 2,674 | 29.9% | 6,903 | 45.8% | 2.40% |
| Jan 31, 2018 | 26,149 | 46.7% | 2,824 | 37.2% | 7,411 | 56.5% | 2.73% |
| Feb 5, 2018 | 24,345 | 36.6% | 2,649 | 28.7% | 6,967 | 47.1% | 2.73% |
Our general advice to firm clients is to stay the course, avoid attempts at market timing, and rely on asset allocation (specifically, the percentage of one’s portfolio not invested in stocks) to soften the extent of the declines.