Monday, October 29, 2018

From the Desk of David Burks: "Stay the Course..." Easy to say. Harder to do.

David Burks
Author position
Sr. Vice President | Equity Income Analyst

From the Desk of David Burks

Hilliard Lyons Senior Vice President and Equity Income Analyst David Burks has been with the firm since 1983. He has been nationally recognized for his stock recommendations eleven times: seven times by Thomson Reuters and four times by The Wall Street Journal. David has appeared regularly on CNBC over the years.

“Stay the Course…” Easy to say. Harder to do.

Whenever stocks tumble, as they have lately, we inevitably hear market commentators encourage investors, “Don’t panic” or “Stay the course.” Which is certainly wise advice as more often than not this approach has proven to be the proper investment strategy. Typically investor patience is ultimately rewarded.

However, doing “nothing” is often very difficult. This is particularly the case when one feels their investments or retirement account is under continual downward pressure. Moreover, it’s simply hard to ignore a sharply falling market, even if one tries. Wherever one gets their news, if the market is plunging chances are an investor is going to be acutely aware of it.

A constant barrage of bad market news often causes investors to want to take action in response. Whether that is selling a declining stock to preserve its remaining value or moving assets into perceived safer and more stable investments, an investor may feel compelled to “do something.” It certainly is understandable why an investor, under duress, would feel the need to react.

This urge to respond is likely driven by a combination of both fear and emotion. It is frightening as well as disheartening to see the value of one’s financial assets decline so quickly. In addition, when there are sudden, violent market moves lower as we have seen lately, there’s a tendency to feel the downward pressure will persist. While history tells us that stocks are the single best long-term performing asset class, that’s little consolation when near-term concerns overwhelm everything else.

Historical Returns

While October’s sharp market pullback has been painful, we still believe history should not be ignored. Over the past 75 years, stocks have generated annual returns of about 10%, far outpacing other common investment options. By comparison, corporate bonds have produced 6% annual returns, with Treasuries and gold producing returns of 4% and 5%, respectively. When factoring in inflation, the differences become even more pronounced. The inflation-adjusted returns for stocks are 7.5% compared to 2.4% for corporate bonds, 0.5% for Treasuries and 1.3% for gold. Thus stocks can be an effective hedge against inflation for long-term investors.

October Through the Years

From a historical perspective, October has been the most volatile month of the year. Over the years it has experienced both dramatic declines and important market bottoms. With that in mind, let’s take a look at where the Dow Jones Industrial Average has closed the month of October every five years for the past fifty years.

Can we discern a trend from these past October Dow levels? We believe this data reinforces the concept that while stocks can be quite volatile in the short-term, they tend to rise over the long-term, reflecting the ongoing growth in corporate profits from successfully managed businesses. While future economic conditions will always vary, our view is that the stock market is more likely to be higher than lower five years from now.


October’s sharp decline has been a difficult and unsettling period for all equity investors. The Dow’s all-time record closing high on October 3rd now suddenly seems quite long ago. A large majority of stocks have retreated by at least 10% or more. The current market environment also serves as a stark reminder that all stocks carry risk, regardless of industry type. Unfortunately, volatility is the price that investors must be willing to pay to have the opportunity to participate in long-term gains.

We don’t pretend to know when the current market weakness will end. Potentially, the market may deteriorate further before improving. Perhaps in retrospect this will have been a fine buying opportunity. Regardless, we think an investor’s focus should remain on the long-term. We don’t believe in trying to time the market, as that has generally proven to be an exercise in futility over the years.

We do strongly believe stocks remain the average investor's best tool to build long-term wealth through capital appreciation over an extended period of time. We think that for the long-term investor there’s ultimately more risk in being out of the market than remaining in it. Stay the course? It’s certainly not easy to do, especially in difficult periods like we’re in now. But does it make sense? Yes, for most investors we believe history says that it does.



Each client’s investment needs, risk tolerance, and goals are different. This newsletter is not meant to be advice for any specific investor. Nothing in it should be construed as an offer to sell, or a solicitation of an offer to buy, any securities. This should not be used as the sole basis for an investment decision. Any opinions or estimates are subject to change without notice. For information about how any of this information applies to your personal financial situation, please contact your Wealth Advisor.

Past performance is not a guarantee of future results.

Although the information provided to you in this newsletter was obtained or compiled from sources that we believe are reliable, J.J.B. Hilliard, W.L. Lyons, LLC cannot, and does not, guarantee that the information or data is accurate, timely, valid, or complete.

All investing involves risk, including the possible loss of principal. You should carefully consider investment objectives, risks, charges, and expenses of any investment before investing. Diversification and asset allocation do not guarantee a profit or guarantee against a loss.

Stock markets, especially foreign markets, are volatile and can decline significantly in response to adverse issuer, political, regulatory, market or economic developments. The bond market is also volatile, and fixed income securities carry interest rate risk. (As interest rates rise, bond prices usually fall, and vice versa. This effect can be more pronounced for longer-term securities.) Fixed income securities also carry inflation risk, liquidity risk, call risk, and credit and default risks.