July 2021 Market Moves
What has our attention this week?
- S&P 500 and Nasdaq are coming off of all-time highs
- Russell 2000 (Small Cap Index) is down over 6% in the last 30 days
- Stock market valuations are at highs last seen around the early 2000
Emotional Consideration for a Market Correction
Parts of the stock market started to sell off this week, down sharply from recent highs. The Russell 2000 Index was down over 4% on Monday. Why is it down you might ask? With the start of the 3rd quarter, it is common for institutions, mutual funds, and money managers to rebalancing their portfolios adding additional movement and pressure to the marketplace. It is easy to forget, some parts of the stock market are up over 100% over last year’s lows. With some stocks and market segments looking very expensive compared to historical averages (P/E ratios, Case/Shiller P/E etc.) We must go back to the dot com days of 1999 / 2000 to see market valuations as high as we are seeing in the major indexes today. This could start to scare money managers, institutional investors as well as retail investors.
Cost of Timing the Market
When there are big downward moves in the stock market in a short period of time a normal human reaction is to feel fear. Want to make the pain stop. Want to sell or act. Our brains are trained to respond to the result of loss, and it serves us very well in most of our life decisions. In finance, it is more complicated, and frequently leads us to bad decisions inconsistent with our financial plans and investment objectives.
What kinds of bad things? Trying to time the market. Selling out of the market completely without a strategy to get back into the market. Increased trading that is inconsistent with our strategy and risk tolerance. Seeking out or jumping into complex investment or insurance products in an effort to profit or avoid losses with the market downturn.
It is important to remember stock market declines of 5 - 20% are common in a 5-year time frame. Not all asset classes will react the same to a large stock market selloff. Funds have to go somewhere, and this will impact the value of other assets such as treasury bonds, corporate bonds, real estate, commodities and other asset classes.
The market is a means to get liquidity for your investments every day. From time to time the market can get challenged by events we cannot foresee or are not sure how to react to such as:
Dot Com Bubble (2000)
Fall of the Berlin Wall
Nixon taking the dollar off the gold standard
The prices presented may not be relevant to the actual value near term or long term. Emotions of the market can sustain prices at low and high prices for long periods of time. In general, the stock market is fairly good at pricing assets.
What to do if you are feeling afraid?
1). Schedule a meeting with us. Let's review your risk tolerance and Riskalyze report. Our reports will give you a visual understanding of our risk. This will help us remember and understand our strategy and how a market downturn will affect our financial planning goals.
2.) Reflect on why you are investing and when the funds of those investments will be needed. If you are actively investing in the stock market today it shouldn't be to pull out funds to pay for basic living expense tomorrow. Equity investments are for funding long term goals needed 5 years out or more.
3.) Review your investment policy statement and written financial plan. (It is in your eMoney vault).Your financial plan will help you understand what you need to do and remind you of what resources you have to navigate challenges and uncertainty. If you do not have them or would like to update them, let's find time to talk.
Kit Lancaster, CFP®, AWMA®
Financial Planning, Investments, Insurance
350 N Orleans #9000N
Chicago, IL 60654