Equity markets have displayed extreme volatility in recent months, but we believe the worst is over. On Monday, December 24th the S&P 500 index experienced Capitulation. Capitulation is reached when a large number of investors “throw in the towel,” so to speak, based on a complicated mathematical calculation of market momentum. Although the calculation of Capitulation is not fool proof, historically it has often been a reliable buy signal.
As you know, we at Southwest Investment Advisors are not advocates of market timing. However, we do follow technical analysis as well as market fundamentals and we do not believe a recession is around the corner. The economic expansion is likely to continue, albeit at a slower rate. In our opinion, too much emphasis is being placed on negative low probability scenarios.
We believe we help people make more money by keeping them from making common investor mistakes than from our investment selection. In keeping with that theme, we believe we need to help calm fears when market volatility rises, and to keep our clients invested and to fight the desire to get out when account values fall.
Stock market declines are scary, but they are an inevitable part of investing. A look back at stock market history since 1900 shows that declines have varied widely in intensity, length, and frequency. In the midst of a decline, it’s nearly impossible to tell the difference between a slight dip, a more prolonged correction, or the start of a Bear Market. Especially one like this one, where the economy is still growing, company earnings are increasing, and a recession is not within sight.
Although no one can accurately predict the duration, since 1982, with few exceptions, market declines have been relatively brief. The biggest mistake one can make now is to get out and lose the opportunity to recover. It is for this reason that most investors do quite poorly investing in the stock market; buying high and selling low.
The table on the back demonstrates that declines in the Dow Jones Industrial Average have been somewhat regular events, although it has been seven years since a -15% decline like we are experiencing now.