Fastest Correction In History…And The Importance of Financial Projections

Last Friday I wrote a market commentary to reiterate my concerns about market valuations but primarily focused on the fact that some technical (short-term) indicators were hitting historical extremes implying the potential for short-term problems in the market.

Last Thursday the S&P 500 closed at $3,386…an all-time high. Today the S&P 500 closed at $2,978 for over a 12% loss in a week. That’s a truly historic move. It’s the fastest correction in history for the S&P 500 and the fastest for the Dow since 1928 just a few months before the Great Depression. The Dow and the S&P 500 are on track for their worst weekly performance since the Great Financial Crisis in 2008.

In the weeks leading up to last Friday’s commentary I could sense investors were getting impatient with the strong run-up we experienced since December 2018. Recall that December 24, 2018 was the bottom of the ~20% decline that commenced in September of 2018. Then, in December of 2018, the Federal Reserve capitulated promising the market what it wanted (easy monetary policy), and the market took off like a rocket from that point through last week. So, anyone who had a remotely conservative approach was likely frustrated from not participating in the run-up as much as they could have if they had been more aggressive.

After all, that’s classic investor behavior isn’t it? We want all the gains and none of the downside!

First of all, let me make it clear I don’t know if this is the beginning of the next bear market or not. I felt pretty strongly the bear market started when the market fell 20% around the fourth quarter of 2018, but, alas, I was mistaken.

However, I am quite confident that there is going to be A LOT of volatility in the coming weeks. And that volatility is likely to be in both directions. I think we’re going to experience large up days along with large down days. History’s biggest up and down days tend to be clustered together, which I wrote about here: Bigger Price Swings in Both Directions.

Regardless of whether the market has peaked for this cycle or will go on to set new highs before this bull market is over, the lesson of the past week is that when markets fall they can fall fast. It is often said that stocks take the stairs up and the elevator down.

Investors would be well-served to remember how they feel this week. Because if this market does pull off another bounce to new highs, and the temptation creeps back in to chase the market higher, it will be important to remember how we feel right now and determine if we’d be comfortable if that uneasy feeling were magnified.

Use your financial projections to guide your investment strategy. Thorough financial projections prepared by a competent advisor should include stress tests that help you identify how much risk you can tolerate before your goals are jeopardized. Your investment strategy, then, should be built based on those results as opposed to blindly investing money without any idea or perspective of how that strategy will impact your short- and long-term financial goals.

For example, if your financial goals (e.g. retirement) can still be confidently achieved in the event of a 20% drawdown of your assets but those same goals are jeopardized in the event of a 40% drawdown then your portfolio should be structured accordingly.

Keep the big picture in mind ⇒ Is the ultimate goal to track the performance of the S&P 500, which represents just one very narrow segment of the world’s total investable assets, or is our goal to maximize the probability that you will be able to remain financially independent for the rest of your life through a variety of market outcomes?

The answer is obviously the latter. However, the approach to achieving that goal may not be as obvious. The most successful approach for that goal is oftentimes forgotten when the market is soaring as we get caught up in the mania of “endless” market gains.

Let me know if I can help you or anybody you know become and remain financially independent through both good and bad markets!

Kindest Regards,
Ken