After an extended period of relatively calm trading, U.S. equity markets dropped sharply last week with the S&P 500 retreating 5.8%. On Monday, global markets plunged sharply again before rebounding from the morning lows.
Taking a longer view, the S&P 500 is down slightly from where it was 12 months ago. International equity markets, particularly Asia, and most commodities also participated in the recent decline.
Coming after a period of unusually low volatility, the sudden shift in market sentiment caught many investors by surprise. In reaction to the stress in equity markets, government bond prices increased with a corresponding drop in interest rates. Given these events, investors are understandably concerned about the financial health and wellbeing of their retirement portfolios.
So what is going on?
There has been a sudden shift in investor expectations about future global growth. For the past few years, the global economy has been driven by growth coming from the U.S. and China. While the U.S. economy continues to do reasonably well, China has been experiencing a slowdown that is impacting other economies around the world. Concerns about China’s growth intensified when the Chinese government allowed a surprise devaluation of the yuan currency.
Adding to the uncertainty, oil prices have dropped dramatically putting pressure on energy companies. Falling energy and commodity prices imply that inflation remains below the desired rate of 2% targeted by the Federal Reserve, muddying the outlook for anticipated increases in the Federal Funds rate. The net impact of these recent developments in global markets is a big increase in uncertainty.
The Financial Engines perspective
It is helpful to keep in mind that downturns like that experienced last week are actually quite common in financial markets. Since 1946, the S&P 500 has dropped by 5% to 10% about sixty times, or once per year on average. Sometimes the downturns are larger, but on average markets have tended to recover their losses within a few months. Dramatic downturns like we experienced in 2008/2009 are much rarer.
We understand that sudden turns in the market can be unnerving to retirement investors. Market history teaches us that investor sentiment can change quickly and without warning. But this goes in both directions. Markets can turn up when you least expect it. Being out of the market when sentiment turns can be quite damaging to your long-term returns. To time the market, you must be correct twice – once to get out of the market at the right time, and again to get back in time to avoid missing a rally. It is almost impossible to time both of these decisions correctly. You are much better off pursuing a consistent strategy of a diversified portfolio in times when markets are volatile.
While no one knows the future, especially in these uncertain times, maintaining a long-term focus, with a balanced mix of equities, both domestic and international, risk adjusted for age, remains the best way to achieve your retirement goals.
If you are nearing retirement and the experiences of past market downturns are fresh in your mind, acting impulsively is probably not the best course of action. Instead, please consider reviewing your total retirement income picture, not just risk and allocation of your portfolio, but also including future expected income streams such as a pension or Social Security. If you are a Financial Engines customer, Investment Advisor Representatives are ready to help you. Feel free to call our Investment Advisor Representatives from 9 a.m. to 9 p.m. Eastern Time at (800) 601-5957.