Was That a Speed Bump or Sink Hole?

Was That a Speed Bump or Sink Hole?

In just 14 trading days from mid-July to early August, the S&P 500 sold off over 8%. Although periods of negative returns never feel good, market corrections are inevitable and part of the process of achieving attractive long-term returns. It is times like these that remind us of the importance of owning diversified assets tailored to individual goals and risk tolerance.

We opined back in May that the stock market, as defined by the S&P 500, might be running “hot” after posting a 26% gain in 2023 and continuing to charge higher in 2024. The gains were driven by a small number of stocks with large market capitalizations (Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia, and Tesla) which dominate the index’s headline return number. Even with the recent sell-off, the S&P 500 is still up 11% year-to-date, while the average stock is up 6% so far this year following a 14% return in 2023. Not bad in a historical context.

Volatility in the stock market is normal, especially after a long period of steady and outsized gains. As shown in the chart below, the average price gain of the S&P 500 (not counting dividends) is just over 10% per year going back to 1980. That’s pretty good! However, in 95% of those years (42/44 years), we have experienced at least a 5% intra-year decline. In over half the years, we experienced a 10% or greater intra-year decline. And in one out of every five years, we experienced an even more severe intra-year decline of more than 20%. These declines are a normal part of a healthy stock market. Periods of excess returns are “corrected”. The causes of these corrections are numerous (recession, inflation, government policy changes, geopolitical events, etc.), but they mostly come as a surprise.

The key takeaway is that in most years (three out of four) the stock market finishes in positive territory despite having a meaningful drawdown sometime during that year. That is why at the Tschetter Group, we build each client’s portfolio with a mix of investment strategies designed with individual goals, needs, and risk tolerance in mind. Beyond public companies (stocks), we own bonds and money market funds to provide a source of liquidity and stability in turbulent markets. For clients with minimal liquidity needs and a longer-term investment horizon, we may also incorporate alternative asset classes, such as private real estate and private credit, and will soon add private equity offerings to the mix. These alternative assets are designed to provide attractive risk-adjusted returns and further diversification benefits.

Your team at Tschetter Group is proactively reviewing and adjusting your portfolio as market conditions and your goals change. Please don’t ever hesitate to reach out if you have questions or concerns.

With Optimism,

Peter Jacobs, CFA®, CFP®, SENIOR PORTFOLIO MANAGER

Nathan Mumford, CFA®, RESEARCH ANALYST

Sources: J.P. Morgan, FactSet, and Tschetter Group

Important Disclosures

The content of this article is provided for general information purposes only and is presented solely as our opinion. The information was compiled from sources that we believe to be reliable, however, we cannot guarantee its accuracy, completeness, or timeliness. This article is based on the information available to us as of the date of this article and may change at any time. Tschetter Group does not provide tax and legal advice. Please consult your legal and tax professional for specific information.

Tschetter Group (“TG”) is a registered investment adviser with the Securities and Exchange Commission. The information provided by TG (or any portion thereof) may not be copied or distributed without TG’s prior written approval. All statements are current as of the date written and does not constitute an offer or solicitation to any person in any jurisdiction in which such offer or solicitation is not authorized or to any person to whom it would be unlawful to make such offer or solicitation. Different types of investments involve varying degrees of risk. Risk Disclosure Statement: All investments include a risk of loss that clients should be prepared to bear.