Have you looked at your 401(k) lately?
Have you calmed down since Monday, when the worst losses on Wall Street in nearly seven years arose such a clatter that people sprang to their 401(k) statements to see what was the matter?
Or did another four-digit Dow debacle on Thursday send you over the edge?
A good bet on who has been doing the most wailing and gnashing of teeth over the market would be the “investors” who look at their retirement accounts every night expecting their portfolios to automatically be larger than they were the day before.
Evidently, there are people who believe that just because the S&P 500 has generated positive total returns for 15 consecutive months, it must continue its relentless climb. They must have thought that days where the market dips 4 percent have been outlawed since Nov. 8, 2016.
After the Dow dropped a record 1,175 points Monday, some acted as if the world had fundamentally changed. It hadn’t, just like it had not fundamentally changed the last time the Dow dropped nearly this much: Aug. 10, 2011, when concerns over the European debt crisis caused the Dow to drop 3.8 percent, or 423 points.
Thursday’s 1,032.89-point drop took the Dow to 23,860.46, about where it closed on Nov. 28.
Recall if you will that the Dow closed above 23,000 for the first time on Oct. 18 and that it took a little more than a month for the index to close above 24,000 for the first time.
In the context of such a steep climb, doesn’t a significant adjustment late during history’s secondlongest bull market sound somewhat appropriate? The only surprise generated by last week’s events should have been that it hadn’t happened sooner.
What about the world fundamentally changed? What made shares of Amazon worth only $1,350 a piece late Thursday, 7 percent less than investors valued them at at the end of January. Or made PNC Financial Services shares worth 5 percent less than they were at the end of the month? Which is a more realistic price?
Was last week’s swoon anything more than changing perceptions or investors reacquainting themselves with fear and risk?
Most pundits shrugged off the broad decline, saying job and economic growth, corporate earnings, and other economic fundamentals remain strong. Their comments fall short of the exuberance of Yale economist Irving Fisher a month before the 1929 stock market crash, when he opined that stocks had achieved “a permanently high plateau.”
Headlines constantly remind us of issues that have yet to thwart Wall Street’s inexorable rise: the failure to pass a federal budget more than four months into the government’s fiscal year; the Congressionally-mandated drama over raising the federal debt ceiling; the amount of new debt the U.S. Treasury will have to issue in a rising interest rate environment to finance President Donald Trump’s $1.5 trillion tax cut.
Tuesday brought word of another nagging worry: the U.S. foreign trade deficit jumped 12 percent during Mr. Trump’s first year in office to $566 billion. Then there’s North Korea and speculation around what the Federal Reserve is going to do with interest rates if the economy overheats. Not to mention the high frequency traders who use algorithms to make massive trades in a matter of seconds, the kind of hyperactivity
that sent the Dow down 1,000 points in a matter of minutes during the flash Crash of May 2010. Several reports indicate hyper traders were on the prowl Monday.
These problems have been with us as the market climbed and they will be with us once the bull market inevitably calls it a day.
Often times these problems aren’t problems until investors say they are — and say it with a vengeance. That assessment isn’t necessarily at hand, but it’s prudent to be mindful of the fact that the day will eventually come.
Sowhat’s an investor to do? Re-evaluate your tolerance for risk. Re-examine the mix of stocks, bonds and other assets in your portfolio aswell as your time horizon. And, although it’s easier said than done, try spending a little less and saving a little more.
Whatever bump your paycheck gets from the tax cuts is an opportunity to do at least one of those things.
And remember that the last time the Dow dropped as it did on Monday was in 2011, when it closed at 10,719.94. Themarket has come a long way since then. For investors whohave the luxury of time, that’s worth pondering.