What’s On Our Minds:

The markets have quickly recovered some of their losses, but that doesn’t mean we’re out of the woods yet.
As we said last week, the market has taken, on average, 220 days after a 10% correction to reach its previous highs. In this quick dip, we’re already up some 7.5% from the bottom and have only about 5% more to go to get back to record highs. Or, 150 points on the S&P and 1,400 on the Dow.

Phew, back to normal, right? Hopefully not. We hope that this dip and the emotions that it stirred will help to reverse two related trends in the financial markets.

First, the “stocks always go up” mentality in savers. While we have certainly had corrections since the Great Recession, there has been just one since 2011: the 12.4% correction in late 2015. Any associated woes were quickly forgotten in the wildly positive markets of 2016 and 2017. Therefore, there is a generation of savers who have been working since 2009-2011 that have never really seen their investment accounts decline.
It’s easy to call yourself a long-term investor when the market numbers are green. “Oh, me? I don’t worry about market volatility. I know if I leave my 401(k) alone, it’ll all work itself out, on average, over the next 15 years,” says the 29-year old as he sips on his latte. “Frankly, I don’t even check my account balance that often,” he lies, as he closes the internet browser he had open on his phone just moments before.

We hope at Tufton that the fictitious Millennial above is as good as his word, because a “market correction of 15%” is a lot easier to rationalize than seeing $13,000 disappear from your accounts in a week. The latter tends to have a lot more impact than we realize. OF course, strength is forged through trials, and this correction wasn’t so bad, so it might temper savers for the next one.

Second, the over-reliance on (or undue faith in) index funds. More and more investors have heard that index funds, on average, outperform their actively managed counterparts. As more money moves into indexes, there are fewer analysts moving dollars to take advantage of mispricings in the market. That is, if a respected analyst comes out and says “Google is too hot! Sell Sell Sell!”, it won’t stay hot for long. But if everyone’s in index funds, it will stay too hot. Those mispricings can grow and cause market distortions.
What will that means for the market? No one knows yet. But a few corrections will help to remind people that we need to have active traders for the markets to function.