Tuesday's rally put a quick end to the Dow Jones Industrial Average's worst losing streak since 2011. But those losing streaks usually bring calls from worried investors — and you should know how to answer them. The next drop could be right around the corner.
First, try putting the decline in some context. The Dow hit an
all-time high of 21,115.55 on March 1, and had fallen 564.57 points through yesterday's close of 20,550.98. Not so long ago, a decline in the Dow of that magnitude would be noteworthy. Today? Not as much. The recent decline measured 2.7%, and that followed a 12-day run-up of 3.9% a month ago.
But if your clients are long-term investors, they should be prepared for much, much worse numbers, and you should remind them of that. Analysts call a 10% decline a correction. To get to a correction level from where we closed Tuesday, at 20,701.50, the Dow would have to tumble another 1,698 points. To reach
bear-market territory — a 20% loss — the Dow would have to plunge 3,809 points.
Dan Wiener, editor of The Independent Adviser for Vanguard Investors, a newsletter, says clients should keep another number in mind: -14.3%, the stock market's
average intra-year drawdown the past 30 years. Based on Tuesday's close, that would be an additional 3,020 points.
Are we in for a
bear market, or at least a correction? Absolutely. The question is when. At the moment, interest rates remain low, as do tax rates. (The former will probably rise, while the latter is likely to fall). Stock valuations — their prices, relative to earnings and sales — are high. And the current bull market is among the longest-lived in history.
Mark Bass of Pennington, Bass & Associates said his reply to worried clients is this: "You know what? I wish it would drop 15% tomorrow. Even though corporate earnings have turned the corner, the market is still overvalued. If it dropped 15% tomorrow, I'd be delighted."
Mr. Bass isn't excited about adding new money to U.S. stocks now.
"There are better values in developed markets, like Europe, and in developing markets. There are places to go," he said.
But people have forgotten that the market falls as well as rises.
"People don't remember that the market dropped nearly 10% just a year ago," Mr. Bass said. "We lived through it and the sky didn't fall."
