Sticking To Your Plan On Down Days

As Jerome Powell started his first day on the job as Federal Reserve Chairman, equity markets offered him a warm welcome—the worst single-day selloff on a percentage basis since Standard & Poor’s lowered its credit rating on the United States in August 2011. Powell’s predecessor Janet Yellen and the rest of the Federal Reserve Board had for years suppressed interest rates near zero, a mathematical gimmick to force would-be bond investors into equity markets in search of higher yields.

For almost a decade we’ve discussed how this unprecedented monetary policy would create a stock market of contradictory behavior—a bizarre “good news is bad news” dynamic in which investors squirm at the thought of positive economic data for fear signs of strength might prompt central bankers to raise rates to normal levels. A reasonable person, for example, might have thought Friday’s stellar jobs report, which finally showed signs of wage growth, might have spurred markets higher. Instead, equity markets responded with a hostile warning to Chairman Powell of what could happen should he dare raise rates more quickly than his predecessor.

Unfortunately, irrational behavior is as contagious as this year’s flu outbreak. Over a decade of stock market growth, investors have grown accustomed to a Dow that sets regular record highs. So as computer trading algorithms kicked off sell trades by the billions of dollars, average investors began to sweat through flashbacks to the panic of 2008. In sudden fear from a disruption of the status quo, investors too often disregard logic and take imprudent action. Amid the selloff, websites of robo-advisor platforms like Betterment and Wealthfront crashed from volume spikes, locking out users scrambling to convert to cash. This system failure ultimately served as a blessing in disguise, saving investors from themselves and proving again the value of accountability to a human advisor who keeps your hand off the sell button.

As advisors, we lead clients away from panic. More important, we don’t try to time a stock market that never behaves in the way even the most brilliant economists expect. Instead, we build long-term, client-specific portfolios with allocations that capture upside on goods days and weather the storm on the bad. Whether from Powell’s next interest rate hike, bad economic data, or Trump’s next tweet, volatility will rise from record lows and return to markets. When it does, reflect on down days not as moments of fear, but as moments of steady confidence in the longer-term plan toward financial wellbeing.