Global markets have swung wildly in recent days, and it should serve as a good reminder that markets do not go up uninterrupted forever. Here is a simple recap of the month of August: The beginning of August saw the S&P 500 at 2,104. It fell to 1,868 on August 25th, (-11.2%), only to recover to 1,972 (+6.5%) on Monday’s close. for the month, the S&P 500 was down 6.3% – the larges single month decline since May 2012. that is the perfect definition of volatility. I contend the recent volatility is normal and to be expected. The market’s lack of volatility over the past four years is not normal and should not be expected to return.
Historical Volatility
Over 1,000 trading days have passed since the last correction of 2011 and the one in which we are presently. Normally, corrections occur about once a year with an average decline of 14%. With the market having gone nearly four years without such a decline, it is understandable why some investors may have been caught off-guard.
Investors should understand volatility and embrace it. volatility is part of the risk premium long-term investors must accept in order to achieve market returns superior to bonds and inflation. As I have written several times in the past, those who are harmed by corrections and bear markets, are those who are surprised by such markets. Don’t be surprised; rather, be prepared.
Be Prepared
Being prepared is understanding market corrections are nothing more than a normal part of investing for the long-term. Corrections are to be expected and need to be accepted in order to succeed as an investor. Being prepared also means understanding your asset allocation and your tolerance for risk. Asset allocation is the mix of assets in your portfolio – often including more volatile assets such as growth investments and more stable investments such as fixed income assets. this asset mix is often driven by where an investor may fall on the risk spectrum from conservative to aggressive. The mix is also influenced by investors’ financial risk tolerance and their emotional or behavioral tolerance for risk.
Too many investors often use a rear-view mirror to adapt their portfolio and make investment decisions – too many investors focus on past performance as an indicator of future performance. This is fraught with risk and should be avoided. The best use of that mirror is to turn it on yourself to truthfully gauge your own circumstances – what your true tolerance for risk may be and what investment objectives you need to achieve.
Roots of the Market Selloff
- China’s economic slowdown and its devaluation of its currency
- Uncertainty regarding the Federal Reserve’s impending interest rate move
- Falling commodity prices
- The lack of a correction in over four years
- Narrowed market leadership – a weak technical indicator
Going Forward
- We do not believe the recent volatility in global markets and falling commodity prices is a sign of an impending global recession.
- The Federal Reserve may be less likely to raise interest rates at its September meeting as a result of recent events.
- Investors should stick with their long-term plan and remain focused on their goals and objectives. Short-term market movements should not derail a sound long-term strategy.
At Doyle Wealth Management, we are here to answer your questions and provide insight and direction. We advise all investors to tune out the noise and remove emotions from investing. Scrutinize and restrict your news intake. Understand that the 24/7 news media is not your friend. Its primary purpose is to sell advertising, not to provide sound, balanced information about the markets.
Please feel free to reach out to any of us with your questions.
