Six Flags Over Wall Street

 by Steve Wachs, CFP®                                                      February 2018

Six Flags Over Wall Street has returned. Over the past week, the Dow Jones Industrial Average moved down dramatically on some days, and then rose strongly on others. Was this unexpected? What caused this volatility? What action should be taken now? These are the questions we will attempt to answer.

Was this unexpected?

No it was not. We wrote the following last month in The Legacy Perspective: Statistically, we are due for a stock market correction. A correction is defined as a 10% or more decline. Over the last 50 years, the S&P 500 has declined on average at least 10% every 24 months. The last one of these drops was February 11, 2016, almost 2 years ago.” Remember we only remind you of our predictions when we are right. The S&P 500 Index officially fell into correction territory on Thursday as it declined over 10% from its record high in late January.

What caused this volatility?

Before you read further, please attempt to answer this question. Frankly, your answer is probably as right as what any of the experts have shared. This all began with an economic report showing potential wage pressure due to low unemployment. Increasing wages and low unemployment – to the normal human being that seems like good news. Charles Wilson, a Thornburg Portfolio Manager, said “People fear the economic data are so good, they’re bad.” Our view is that stock values don’t go straight up without volatility increasing at some point. We reached that point.

What action should be taken now?

No action should be taken now. Matt Quinn at Legacy shared the following “We do our best work planning for a market correction rather than reacting during a market correction since we are never sure when they will occur or how long they will last.” At the end of last year, we rebalanced many portfolios as equity weightings had increased. For clients who need a “pay check” from their portfolios, we raised cash by capturing gains.

We also wrote the following in the latest Perspective, “Our philosophy of diversification allows you to participate in the equity markets with an allocation that is customized to both the timeframe of your goals and your ability to tolerate risk.” It’s during times like this past week that having a diversified portfolio is particularly important.

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