Recent stock market numbers may look a little scary – down 300 points one day and then up 200 points the next. It’s been a while since we’ve seen such volatility, which can raise fear in the minds of investors –especially when the general trend appears to be down. It doesn’t help matters when the media use words such as “plunging” and “tanking.”
After a long period of unusually calm markets, volatility has returned to the market. These levels of volatility have not been seen since November 2011. However, this is not unexpected; as many market analysts have been commenting on the possibility of 10%-12% pullback since July. Put into perspective, through October 16 the Dow Jones Industrial Average was down 6.73% from its September highs while the Standard & Poor’s 500 Index (S&P 500) was down 7.34%.
The increase in volatility reflects a number of concerns:
• Geopolitical tensions
• Slower growth in Europe
• Possible spread of Ebola
Downside risks to the global outlook include fear of Europe falling back into recession and the European Central Bank’s limited ability to support growth. Additionally, U.S. firms doing business in Europe may see weaker earnings, made worse by the stronger dollar. On the other hand, falling commodity prices, especially lower gasoline prices, should help support consumer spending growth in the U.S., Europe and nearly all other major economies, into 2015.
Our belief is the recent pullback, which began in mid-September, remains within the framework of a long-term bull market with years left to run, driven by a number of transformational forces, including:
• American creativity
• New energy development
• Unrivaled U.S. manufacturing depth
• Vast amounts of capital still sitting on the sidelines.
It is during times like these that the value of asset allocation and a diversified portfolio, including an appropriate mix of equities and fixed income investments, is most apparent. While equities have pulled back, bonds have rallied with the 10-year Treasury yield at its lowest level since mid-2013. Many market participants are seemingly viewing the United States as the last safe haven given the confluence of recent events. From September 19 to October 16, the S&P 500 declined 7.34%. In contrast, a diversified portfolio consisting of 60% S&P 500 and 40% Barclays U.S. Aggregate Bond Index declined only 3.59%.
Long-term investors should be looking at this time in the equity market as an opportunity. In market declines most stocks go down and attractive entry points are likely to surface for these previous leaders. In most cases nothing has changed fundamentally, yet the prices have declined. All of this points to the importance of taking a long-term, planning-oriented view within portfolios, while keeping some amount of cash available to take advantage of opportunities as they arise. As the legendary investor Warren Buffet once said, “Be fearful when others are greedy and greedy when others are fearful.”
*Some information provided by Raymond James Investment Strategy Committee.