Too much of a good thing can be wonderful, at least, if actress Mae West was right. But when it comes to your investments, we’d argue too much of a good thing can be downright
Consider what’s going on among blue chip stocks in today’s low yield environment. Anyone seeking income from bonds knows that yields are at historic lows. As such, many investors have sought blue chips stocks and their healthy dividends as an equivalent to traditional bonds. We don’t believe this to be a terrible idea, but it definitely comes with its tradeoffs and we question whether those risks and rewards are getting the attention they deserve today.
Beginning August 20th, the S&P 500 declined over 10% in 4 trading days. While a 10% drop is the unofficial definition of a typical correction, the speed at which the decline came was rare. In fact, since 1965 there have only been 5 other “events” that included a 10% correction in just 4 trading days: 1987, 1998, 2002, 2008, and 2011.
We examined those past events to see what we could learn. The accompanying chart shows the last 5 events 3 months before and 3 months after their 4-day drop. Our first takeaway?
In 4 of the 5 historical events, the S&P 500 showed gains 3 months later, while 1 event (2008) led to deeper losses. Last week, we heard many market pundits point to data like this to encourage investors that a rebound was likely.