While past performance is no indicator of future performance, a knowledge of history and the difference between confidence-driven bear markets and recession-driven ones should remind investors—your clients—not to panic after Friday’s continued fall in the equity markets. (The S&P 500 fell 41 points, or 2.1%, to 1880.)
That was the (paraphrased) message sent Friday after the market’s close by Brad McMillan of Commonwealth Financial Network, who argued that “the basic economics remain sound” and that “overall, the economic news isn’t grounds for today’s decline” in the markets.
McMillan, the independent BD’s chief investment officer, said in a prepared statement that while there “may be more short-term damage” to the markets than he thought initially, goes on to even-handedly make the case for why things might get worse, and why they might get better.
Proposing that since there is no economic news sufficient to cause a downturn, he lays 2016’s poor start to the markets to “cracking” investor confidence. Yes, the S&P 500 has “broken both its 200- and 400-day moving averages,” which he admitted “often suggests further weakness ahead.”
If we faced the threat of a real recession—when companies will “earn (and therefore be worth) less…scared investors will be willing to pay less for any stream of earnings. The drop in prices reflects this double whammy, and any recovery has to come from (1) an improvement in companies’ earnings prospects, and (2) a recovery in investor confidence. On average, this takes about 30 months.”
However, in confidence-driven bear markets, “company earning power remains as expected; all that erodes is the willingness of investors to pay up. That, historically, has taken less time to recover—about six months.”