As is our practice when US stock prices experience significant declines, we write to comment on what we think is happening. The declines of October 10th were as follows:
S&P 500, down 95 or 3.3%; Dow Jones, down 832 or 3.1%; NASDAQ, down 316 or 4.1%.
We suggest putting the declines in the context of recent gains, in this case measured from 2018 highs and year-to-date (YTD) 2018 gains:
|S&P 500||% Change||DOW Jones||% Change||NASDAQ||% Change|
|Oct 10 (TYD) Close||2,785||4.1%||25,599||3.5%||7,422||7.5%|
Much of the media commentary on the reasons for the declines centers on rising interest rates, but October 10th actually saw a small decline in the ten-year US Treasury benchmark. This makes us wonder why this particular day saw such a sharp stock selloff. That said, there has been a significant rise in the benchmark rate since year-end 2017, from 2.4% to the current 3.2%. During most of this period, stock prices have in fact been rising.
Further, stock returns so far this year continue to be better than bond returns, which are modestly negative because of the rising rates. However, bonds have a self-correcting mechanism when rates rise, as the additional interest earnings substantially offset the price declines over time. The issue with stocks is that they have no such mechanism; stocks can suffer serious short-term declines that might not recover any time soon, and can therefore create doubt and unease in the plans of otherwise long-term investors. Which brings us to our constant refrain: Your asset allocation, i.e., the percentage mix of stocks and bonds, is the main defense against the unpredictability of stock price volatility.
Our advice, as usual, is to stay the course with your established allocation, designed to allow you to withstand unsettling short-term price declines.