The Crash Begins. And There’s Nowhere to Hide.

The day has come my friends. A dip…finally. Or as some are calling it…a market crash.

Over the weekend, the US stock-market tumbled 666 points in the biggest fall since June 2016. In fact, it’s the 531st worst day in the history of the Dow Jones Industrial Average – we’ve seen this before.

What we haven’t seen before however, is the stock market trading 310 days without back to back 0.50% declines. Let that sink in for a moment. We need to go back to November 2, 2016, since we’ve had two days in a row of declines of just half a percent.

Source: BIG

Given we haven’t seen a meaningful pullback for some time, the current decline is going to feel extremely painful for some investors. And for investors who haven’t witnessed these types of declines, not pressing the sell button is going to be a little difficult, which in turn could make things a little worse.

The stock-market is a giant distraction to the business of investing. Invest for the long term, and pay no attention to the foolishness that goes on in the short term in the stock market.

– Jack Bogle

To put Friday into perspective, it marked the seventeenth -2% day for the S&P500 in the last five years. An average of 3.4 times per year.

 

Source: Michael Batnick

The funny thing is though, when the stock market rises for such a long period, we’re telling everyone a pullback is due. And when it finally arrives, everyone freaks out. Here’s market volatility, also known as the ‘fear index’, climbing it’s way higher after claiming record lows in November 2017.

One of the other reasons the market is freaking out is because both bonds and stocks fell at the same time, something that isn’t supposed to happen…apparently.

Bonds are supposed to provide your portfolio with support when stocks are losing money, as they’re supposed to act as a diversifier. But what is supposed to happen to stocks when bonds lose money? Can stocks diversify your portfolio from bonds? Ben Carlson of A Wealth of Common Sense ran the numbers a little while ago, however I decided to look into it myself. I’ve crunched the numbers, and here’s what I’ve found.

I’ve taken the S&P500 and Five-Year US Treasury data going back to 1926 and adjusted it for inflation. First, I looked at how bonds performed when the stock market was down:

Date S&P500 Five-Year US Treasury
Jan-30 -13.80% 5.88%
Jan-31 -32.26% 13.42%
Jan-32 -45.58% 8.13%
Jan-33 -13.81% 18.78%
Jan-35 -23.44% 5.80%
Jan-38 -39.25% 2.03%
Jan-40 -0.89% 4.79%
Jan-41 -14.08% 1.68%
Jan-42 -7.02% -10.12%
Jan-47 -12.85% -17.29%
Jan-48 -1.67% -9.40%
Jan-58 -8.62% 2.07%
Jan-63 -6.21% 4.41%
Jan-67 -9.37% 2.44%
Jan-70 -13.42% -7.47%
Jan-71 -1.38% 13.18%
Jan-74 -18.79% -4.63%
Jan-75 -22.71% -5.65%
Jan-77 -4.92% 4.89%
Jan-78 -11.72% -3.34%
Jan-82 -11.82% 1.26%
Jan-83 -0.83% 24.84%
Jan-88 -8.30% 0.98%
Jan-91 -3.68% 6.42%
Jan-93 -1.70% 9.02%
Jan-01 -15.21% 10.58%
Jan-02 -23.10% 5.81%
Jan-03 -34.55% 8.94%
Jan-08 -15.48% 8.89%
Jan-09 -47.04% 8.38%
Jan-12 -4.01% 5.30%
Jan-16 -2.38% 0.34%
Average -14.68% 3.76%

Then I looked at how the stock-market performed when bonds were down:

Date S&P500 Five-Year US Treasury
Jan-42 -7.02% -10.12%
Jan-43 25.57% -6.06%
Jan-44 16.75% -0.44%
Jan-45 17.36% -0.08%
Jan-46 41.79% -0.16%
Jan-47 -12.85% -17.29%
Jan-48 -1.67% -9.40%
Jan-51 36.45% -7.11%
Jan-52 18.18% -3.81%
Jan-57 5.08% -2.10%
Jan-59 39.74% -3.15%
Jan-66 8.76% -1.30%
Jan-68 8.67% -2.37%
Jan-69 11.30% -0.47%
Jan-70 -13.42% -7.47%
Jan-74 -18.79% -4.63%
Jan-75 -22.71% -5.65%
Jan-78 -11.72% -3.34%
Jan-79 14.18% -5.36%
Jan-80 18.44% -11.78%
Jan-81 13.67% -6.16%
Jan-89 16.02% -0.56%
Jan-95 5.26% -7.54%
Jan-97 24.05% -0.75%
Jan-00 13.18% -5.57%
Jan-05 4.23% -0.97%
Jan-06 9.65% -3.25%
Jan-10 32.00% -1.49%
Jan-13 15.83% -0.64%
Jan-14 23.33% -3.40%
Jan-17 20.00% -2.46%
Average 11.33% -4.35%

Here’s all the data and the take out:

Date S&P500 Five-Year US Treasury
Jan-27 4.20% 7.49%
Jan-28 35.21% 5.56%
Jan-29 52.42% 1.33%
Jan-30 -13.80% 5.88%
Jan-31 -32.26% 13.42%
Jan-32 -45.58% 8.13%
Jan-33 -13.81% 18.78%
Jan-34 65.65% 0.98%
Jan-35 -23.44% 5.80%
Jan-36 58.54% 4.29%
Jan-37 27.64% 0.60%
Jan-38 -39.25% 2.03%
Jan-39 14.83% 7.05%
Jan-40 -0.89% 4.79%
Jan-41 -14.08% 1.68%
Jan-42 -7.02% -10.12%
Jan-43 25.57% -6.06%
Jan-44 16.75% -0.44%
Jan-45 17.36% -0.08%
Jan-46 41.79% -0.16%
Jan-47 -12.85% -17.29%
Jan-48 -1.67% -9.40%
Jan-49 8.11% 0.72%
Jan-50 18.67% 4.07%
Jan-51 36.45% -7.11%
Jan-52 18.18% -3.81%
Jan-53 14.45% 0.85%
Jan-54 0.92% 2.80%
Jan-55 46.01% 2.44%
Jan-56 23.81% 0.34%
Jan-57 5.08% -2.10%
Jan-58 -8.62% 2.07%
Jan-59 39.74% -3.15%
Jan-60 2.31% 0.25%
Jan-61 5.59% 7.70%
Jan-62 12.84% 1.32%
Jan-63 -6.21% 4.41%
Jan-64 17.90% 0.63%
Jan-65 13.07% 3.17%
Jan-66 8.76% -1.30%
Jan-67 -9.37% 2.44%
Jan-68 8.67% -2.37%
Jan-69 11.30% -0.47%
Jan-70 -13.42% -7.47%
Jan-71 -1.38% 13.18%
Jan-72 3.80% 4.78%
Jan-73 10.86% 0.35%
Jan-74 -18.79% -4.63%
Jan-75 -22.71% -5.65%
Jan-76 28.71% 1.15%
Jan-77 -4.92% 4.89%
Jan-78 -11.72% -3.34%
Jan-79 14.18% -5.36%
Jan-80 18.44% -11.78%
Jan-81 13.67% -6.16%
Jan-82 -11.82% 1.26%
Jan-83 -0.83% 24.84%
Jan-84 8.39% 5.04%
Jan-85 0.84% 10.81%
Jan-86 4.41% 14.99%
Jan-87 18.38% 13.96%
Jan-88 -8.30% 0.98%
Jan-89 16.02% -0.56%
Jan-90 3.63% 5.56%
Jan-91 -3.68% 6.42%
Jan-92 10.68% 9.42%
Jan-93 -1.70% 9.02%
Jan-94 3.07% 7.28%
Jan-95 5.26% -7.54%
Jan-96 23.88% 12.06%
Jan-97 24.05% -0.75%
Jan-98 16.85% 8.49%
Jan-99 23.64% 7.18%
Jan-00 13.18% -5.57%
Jan-01 -15.21% 10.58%
Jan-02 -23.10% 5.81%
Jan-03 -34.55% 8.94%
Jan-04 30.73% 1.92%
Jan-05 4.23% -0.97%
Jan-06 9.65% -3.25%
Jan-07 11.21% 1.23%
Jan-08 -15.48% 8.89%
Jan-09 -47.04% 8.38%
Jan-10 32.00% -1.49%
Jan-11 16.45% 4.10%
Jan-12 -4.01% 5.30%
Jan-13 15.83% -0.64%
Jan-14 23.33% -3.40%
Jan-15 10.11% 4.21%
Jan-16 -2.38% 0.34%
Jan-17 20.00% -2.46%
Average 6.78% 2.28%

Source: Returns 2.0

Since 1926, the stock market has been down 32 years out of 91, and the bond market has been down 31 times – an average of around 35%, or up around 65% of the time. Of the 31 years that bonds were down, stocks were also down in just 7 of those years – or 22.58% of the time. Put differently, stocks were up >77% of the time bonds were down.

What we have witnessed over the weekend doesn’t happen too often, but it does happen. Stocks diversify bonds and bonds diversify stocks. Most importantly, investors need to ensure the allocation between bonds and stocks in their portfolio is the right mix for them. The allocation to stocks in my portfolio is almost 100%. The allocation to stocks in most of our retired clients’ portfolios is between 50% and 70%. There is no “right” mix for all. Investors must find the right mix for them.

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