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Stock Market Prices Fluctuate - Expect It!

July 16, 2019
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Stock market prices on any given day are a function of the collective information known by millions of investors globally.  Specifically, changing global economies, corporate earnings, interest rates, and geopolitical issues are all changing for the better or worse daily. These factors and many more are considered and weighed by all investors, and this mass of investors (institutional and individual investors both) decide what the price of a given security should be on any given day.  Thus, we have up days and down days, or up months and down months, or up years and down years. This has been the case since stock markets were established.   Stock market prices on any given day are a function of the collective information known by millions of investors globally.  Specifically, changing global economies, corporate earnings, interest rates, and geopolitical issues are all changing for the better or worse daily. These factors and many more are considered and weighed by all investors, and this mass of investors (institutional and individual investors both) decide what the price of a given security should be on any given day.  Thus, we have up days and down days, or up months and down months, or up years and down years. This has been the case since stock markets were established.   

Since investors are emotional humans (like you and me), the collective emotional factor of society is reflected in changing stock prices.  Some like to call it “investor psychology” and/or “investor enthusiasm”.  It is either rising or falling at any given time.  Thus, stock prices, too, are either rising or falling as well.

The chart above shows the stock market movements from 2008 to 2019. All the periods of time in blue-highlighted area, are those in which the correction was between 5-10%. As you can see, this happens just about once every year or so. The red‑highlighted period means a more than 20% decline.

In the chart above you will note that since 2009 we have generally had up markets punctuated by periodic sharp down periods – these we call corrections. Technically, when a correction exceeds 20%, we then call it a bearish phase or a bear market. Note the 2008-2009 bearish phase when the stock market dropped 56.8% in less than 18 months. This was not a fun period to be invested. But in usual resilient fashion – stock prices rallied sharply in 2009-2011, and recovered much of that loss very quickly.

Corrections or price setbacks are a very normal part of how markets function. We have not had a bear market correction (greater than 20%) since 2009. The 4th quarter of 2018 did get very close (in fact, it was down 19.8%) to a bear market. I am fairly confident that we will have another 20% correction at some point in the next 2-3 years. What will be the catalysts? There is no way to know at this point what will create the bearish phase – it could be a recession, it could be an interest-rate shock, it could be a war, or perceived threatened war, or it could just be a period of extraordinary volatility. Prepare yourself today for that volatility. How do you do that? You make sure you have the right mix of asset allocation: real estate, bonds, stocks and other investments. When you are well diversified it is much more comfortable going through those bearish phases. In the midst of all this volatility, many US companies like Alphabet (Google), Netflix, Adobe, Salesforce.com, and many others, are creating great value for shareholders regardless of the ups and downs of the market as a whole. Thus, we prefer at Cabot to focus on the successful entrepreneurs in our society who are innovating and creating new wealth from their innovative services. Longer term, stock markets are generally building value – shorter term, anything can occur – brace yourself for that reality!