In case you missed it, we’re re-publishing the note we wrote originally on August 5, 2024, when the S&P 500 stock index declined by 3%. Stocks have been up and down since, with the S&P gaining 2.3% on August 8. This is yet another example of why it’s impossible to make short-term predictions about market movements, and why it’s therefore best not to react to large declines, since you might miss an eventual recovery.
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The US and other world stock markets have declined significantly over the last few weeks. We have no way of predicting what will happen, of course, but we think it’s helpful to put these declines in context.
We hope this provides some comfort going forward. As always, we’re available to discuss any of these topics at your convenience.
- Broadly diversified stock indexes and funds have fallen since their recent peaks on July 16. The S&P 500 index is down 8.5% in this period, while Vanguard’s total US stock fund has declined 9.1% and Vanguard’s total world stock fund (including US, developed and developing country international stocks) is down 7.7%.For 2024 year-to-date, however, all three of these indicators are still up between 6% (world stock) and 9% (S&P 500). Despite recent less-good news on employment and consumer spending in the US, which appear to be a significant factor in the recent sell-off, the US and world economies have seen declining inflation and positive economic growth for the year.
- While stock prices have declined, bond prices have risen significantly in 2024. Bond prices rise when interest rates fall, and the benchmark 10-year US Treasury has gone down from 4% at the start of the year to 3.78% currently. The declines are more dramatic compared with the 4.9% level in October of 2023 and 4.7% as recently as April of this year.There are many factors involved in falling interest rates, including reduced inflation and expectations of upcoming rate cuts by the US Federal Reserve. In any case, the rising bond prices have served to cushion diversified portfolios against the stock price declines, as also happened during 2000-02 (“dot com bust”) and 2007-09 (“Great Recession”).
- Stock price declines happen regularly. The most recent market correction (generally defined as a decline of 10% from a previous high) occurred from August through October of 2023. No one likely remembers that now, since it happened in the middle of a year when stock markets around the world rose more than 20%. Stocks fell more than 30% in the early months of the pandemic in 2020, but quickly recovered to gain around 20% by the end of that year. Recoveries from the larger declines in 2000-02 and 2007-09 took longer, but generally occurred within a couple of years.The key point is that you only benefited from the recoveries if you stayed invested in the markets. Anyone who sold during these admittedly difficult, often scary periods had to decide when to buy back into the markets, and potentially missed the recoveries completely.
- This brief history highlights a few important investing concepts:
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- Trust your asset allocation. All of our Park Piedmont clients have customized plans for investing in a diversified portfolio of riskier (generally stocks and high-yield income investments) and less risky (generally bonds and cash) assets. These are designed to meet your specific long-term needs and goals, and account for your time horizon and risk tolerance (see discussion in Jeff Sommers’ article, “Why You Should Be Taking a Hard Look at Your Investments Right Now,” in The New York Times on August 2). That means the allocations are supposed to help you to live through the occasional downturns, with the understanding that you’ll participate in recoveries and do well when the markets rise. If that’s not the case, please let us know and we can revisit your asset allocation.
- Re-balance as appropriate. The Sommers article mentioned above highlights the importance of regular re-balancing, or returning to your target allocation when one asset class has drifted significantly from its target. The stock market gains since 2022 might have pushed your stock allocation above your targets, for example, while the recent declines might have brought the stock allocation back into line. We review re-balancing opportunities regularly on your behalf.
- Re-invest over time. If re-balancing does make sense for you, we recommend making any changes over time instead of all at once. This is referred to as “dollar cost averaging” and represents an attempt to mitigate the risk of making a large change all at once.
Again, your Park Piedmont advisors are here to discuss any of these topics and answer your questions, as they arise.