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There’s no diplomatic way to say this: the global stock markets are in panic mode right now. In two weeks of trading, the U.S. S&P 500 index is down 8% on the year, which brings us close to correction territory (a 10% decline), and has brought some to predict a bear market (a 20% decline).

Keep in mind that our process doesn’t predict – we act on the facts of supply and demand. Underpinning our investing strategy is a set of three core beliefs about the market:

  1. We don't know where the markets will go – and neither does anyone else.
  2. Wherever the market goes, it will get there by trending.
  3. Along the way, there will be outperformers and underperformers.

Armed with these core beliefs, we are well equipped to handle whatever the market brings – all without a single prediction. Using supply and demand analysis, our strategy concentrates on identifying market trends to determine market exposure, identifying outperformers to include in our portfolios.

Since 1950, the U.S. markets have experienced a decline of between 5% and 10% (the territory we’re in already) in 35.5% of all calendar years – which is another way of saying that this recent drawdown is entirely normal. One in five years (22.6%) have experienced drawdowns of 10-15%, and 17.7% of our last 56 stock market years have seen downturns, at some point in the year, above 20%.

All losses are difficult, but our process is not designed to protect against the normal volatility of the markets. As I have mentioned many times, our goal is to protect against declines that take many years to recover from.

Stocks periodically go on sale because people panic and sell them at just about any price they can get, in their rush to the exits, and we are clearly experiencing one of those periods now. Whether this will be one of those 5-10% years or a 20% year, only time will tell.

We began de-risking our portfolios in mid-December, and will continue with significant adjustments when the US market reopens on Tuesday. We have avoided all the sectors of the market that have had tremendous losses. While not much of a consolation, we are declining less than the broad market and less than our benchmarks, at least year-to-date. 

Whether this increased volatility is a correction or turns into a bear market, how deep it might go and how long it might last is anybody’s guess. The only thing in your control is what you choose to do or not do. Making decisions in the heat of the moment is almost never a good idea, which is why having a plan in place is so important. Knowing that you have an answer, whether stocks go up, down or sideways a is really liberating feeling.

During periods of market volatility, I attempt to increase my communications to keep you better informed. If you have questions or concerns regarding your portfolio, please do not hesitate to contact me at any time.