Stock markets plunged Monday, as if magma building under a bubbling volcano had finally let off some steam.
Exuberance in the wake of tax reform, low unemployment, a bullish first-quarter forecast from the Atlanta Federal Reserve GDPNow model – it was only a matter of time before the pressure from this latest run up was going to pop, financial advisors say.
On Friday, it did. And on Monday, even more.
“It got a head of steam and good old human behavior took over,” said long-time financial advisor Leon C. LaBreque, managing partner and CEO of LJPR Financial Advisors in Troy, Mich.
Nervous clients kept asking about a correction and then pressed for when to expect one. Now investors finally have an answer, LaBrecque said.
But in interviews Monday after the market close, financial advisors sounded almost relieved that that bubble had popped – at least a bit.
“We’ve been preparing clients for this for a while because we haven’t had anything close to a normal pullback – something we’d see every 12 to 18 months – for several years now,” said Sandra Adams, a partner with the Center for Financial Planning in Southfield, Mich.
Loss of Almost 10 Percent
The Dow Jones Industrial Average fell 1,175 points, or 4.6 percent, to 24,346 on Monday, while the S&P 500 lost 4.1 percent.
Monday’s decline, the Dow’s largest single loss ever, came on the heels of a market dive Friday.
By Monday’s close, the Dow had lost around 2,200 points since Jan. 26, a decline of nearly 10 percent – a whisker short of correction territory.
Even so, the Dow is up 0.7 percent for 2018.
Friday’s jobs report showed U.S. wage growth rising at its strongest annual rate since June 2009, and a separate forecast from the Atlanta Fed called for GDP growth of 5.4 percent in the first quarter, revised upward from 4.2 percent in January.
Investors were worried that higher inflation and higher interest rates were in the offing and sold, analysts said.
The market dive was a reaction to an economic order that was too good.
But for an investor, a 5 percent decline trimmed a $100,000 portfolio by $5,000, a $200,000 portfolio by $10,000.
“It’s still painful for investors,” said David Lau, CEO of DPL Financial Partners, a company that works to develop products and strategies for registered investment advisors.
“I don't look at it as a long-term downward slope, but the market is, as everyone knows, at an all-time high so a bit of a correction is not unexpected,” he said.
Advisors Seek to Reassure Clients
Long-time clients who have lived through market peaks and troughs and understand the virtues and bulwarks of a diversification strategy tend to be more resilient in the face of sudden turnarounds.
Younger clients with less perspective – the “nervous Nellies” – need reassurance and some hand-holding, so for them it’s important to fill the outlook screen with the big picture, advisors said.
Macroeconomic indicators point to low inflation, positive GDP, and tax reform fueling an expansion.
The chance of a recession in 2018 remains very low, and wage growth, with average hourly earnings rising to $26.75 in January, is up 2.9 percent over the past year.
Some volatility is normal, perhaps even welcome, seen as 2017 was such a steadily rising year for the stock market.
The frothy volcano that hasn’t blown its top in decades is the one volcanologists worry about most.
“Market pullbacks are normal, some might even say, healthy,” said Stacy Francis, a financial planner in New York City. “In fact, there is a market correction of 5 percent, typically, at least once a year, just like today.”
Declines test the advisor’s investment parameters and asset allocations, and contractions offer an opportunity to remind clients how diversified portfolios take advantage of opposite or adverse investment environments, advisors said.
Or, a bit of market volatility could be the perfect time to talk about reallocation of the retirement portfolio or chat about the “draw down” number for retirement investors.
“Volatility is normal in the marketplace,” said advisor Eric Dostal, advisor and vice president at Sontag Advisory in New York City. “It’s really about asset allocation for the long term and volatility is to be expected.”
The past few days present a rebalancing opportunity, he said.
Coming Full Circle
Nearly all reputable advisors planning for long-term retirement insist that investors not panic and “keep the (long-term) target painted.”
If the objective is to retire in 15 years, what difference does it make if the retirement portfolio falls to $180,000 this week from $200,000 last Monday?
Stay the course, particularly with economic fundamentals so strong, advisors said.
But the declines of the past two days do raise a question.
If money is flowing out of equities, where’s all that money going? Money isn’t going into bonds, said LaBrecque.
“It must be sitting in cash and the good news is that when it’s sitting in cash, it’s got to go somewhere eventually,” he said.
And where would that be?
For many, quite likely back where clients were to begin with, which is where advisors would have preferred clients to remain all along.
InsuranceNewsNet Senior Writer Cyril Tuohy has covered the financial services industry for more than 15 years. Cyril may be reached at firstname.lastname@example.org.
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