It’s the End of the World, Again

It has been mused about money: easy come, easy go. Leading up to the early February 2018 market sell-off (the “Valentine Decline”), we saw record amounts of new funds rushing into equities. Funds that could be tersely described as “ignorant money” – I can’t help but think that at least some of it was the same money that exited Bitcoin two months ago. For those who invest this way, money feels more like, “hard come, easy go”.

As we courageously sink into correction territory (a 10%+ decline), most of us who keep an eye on these things will wonder if this will result in a bear market (a 20%+ decline). In my book Wealth by Virtue, I created a chart from raw numbers of the S&P 500. I wanted to answer for my readers these very questions. I wanted to provide a numerical guide to illustrate how horrific stock market declines are routine and ordinary.

Right now, we are in a “Severe Decline” of 10-20%. We can observe:

  • Going back to 1928, they have occurred every 1.08 years
  • 69% of the time, they escalate to the next level (i.e. decline more than 20%)
  • If it doesn’t escalate, on average, the decline takes 6.15 months to erase

Here is the chart from my book (page 84):

Only a fool would prognosticate whether the Valentine Decline will escalate – nobody knows this. However, we can see this chart and observe that bear markets happen every 4.62 years. We haven’t crossed this mark since the Financial Crisis that bottomed out 9 years ago – unless you count the bear market near-miss of 2011 which declined 19%. Either way, we are long overdue to pay our sacrifice to the bear market gods.

For those of us who look to equities for our long-term financial security, it’s important to muscle in a long-term perspective. At the bottom of the Financial Crisis in March of 2009, the value of the S&P 500 closed at 676. At the time, the common prediction of the pundits was that it would take us a decade to see growth again. Were you to go onto these financial shows and declare that you thought prices would double in 10 years, you would have been laughed off the air. Yet, as it stands now, prices have roughly quadrupled what they were at that low. For those of us who took faith in the underlying value of American businesses, does it really matter whether the prices were 4.2x off the bottom two weeks ago, or 3.8x today? Or, if it bottoms out at 3.4x before turning around? Not really.

While stock market declines always have a strong pucker-factor, there’s no shame in simply not trying to forecast its end result or speculate on its cause. We can remain entirely agnostic, ignorant, or indifferent about this decline or any other decline. We are kidding ourselves to try to explain it other than that it is normal, and part of the price of admission to enjoy a superior long-term return.

And so, as we hear the cries of the pundit-ati that it is, yet again, the end of the world, we must think for ourselves, as the only ones accountable to our financial creeds: what do you believe about the normalcy of this decline?

For what it’s worth, while the Valentine Decline has been horrifying, the S&P 500 is down to the same prices we saw as record prices only two months ago. Declines are never fun, but if in December I told you that after years of growth, the stock market was going to give you a 0% return the next two months, it probably wouldn’t have been a big deal. Yet, of course, it never feels that way.


Chad Gordon is the author of Wealth by Virtue and founder and CEO of GreenStar Advisors, a registered investment advisor. He advises individuals, couples, and families toward wealth-optimized decisions using holistic financial planning, disciplined investment strategies, and proactive personal service. He has a passion that clients operate by a long-term conceptual framework that guides them through all financial decisions.

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