What is Normal?

Investment Management

Jan 10, 2022

The recent market volatility has prompted calls and e-mails from clients and friends asking us if this is the end of the bull market. Some people are flat out telling us that this is it. There are plenty of headlines that can generate negativity. Inflation, the Fed, Ukraine, China, high multiples, etc. The reality is nobody knows how it will all play out. Nobody ever does. What they do know is that fear sells. The permabears are coming out and getting more airtime calling for the same 50% drop that they’ve been calling for since 2009. The only problem is that a 50% drop from today’s levels would still leave the market substantially higher than where it was when they started proclaiming their thesis to anyone who will listen.

Corrections are not enjoyable. We talk about them, prepare for them by diversifying our accounts, and understand that it is part of investing. However, it still is not a good feeling when it happens. In times like these, we have to remember that whether we like it or not, corrections are normal. To take it a step further, last year wasn’t normal. The chart below from J.P. Morgan says it all. The market experiences an average intra-year drop of 14% going back to 1980. In fact, last year was one of 4 years since 1980 with an intra-year drawdown of 5% or less. The rest had drawdowns of 6% or more. Despite that, 32 of the 42 years had positive returns.

While we acknowledge that the market has some significant headwinds this year, it is important to put things into perspective. First and foremost, when do things ever feel perfect? Those are usually the euphoric moments where the black swan comes in and brings us back to reality. In the end, short term predictions are just noise. The volatility we are currently experiencing is normal, and it serves as a reminder of why we diversify. Making a plan and committing to an asset allocation that fits your risk profile will win in the end.


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