Volatility is Back
Written by: Steve Bouchey
Happy Columbus Day !!!
Investors haven’t experienced volatility like this in quite some time and you’d have to go back to October 2011 for the last time the markets suffered a 10% correction. Last week’s roller coaster ride was enough to remind investors that stocks never continue on straight path up but rather experience some dips and drops along the way. Before I share my thoughts, let me say that investors who are invested for the long-term should stay calm. It’s a good time to look at what you own and make sure you are comfortable with the mix of stocks to bonds/alternative assets and cash that make up your portfolio.
The Fed’s accommodating monetary policy over the last six years has helped fuel this stock market rally and investors fear it may be ending soon. The good news is that the U.S. economy continues to grow with companies adding more workers to their payrolls and consumers ramping up their spending. Beginning this week we will see if Corporate America continues to increase profits as 3rd quarter earnings are released. Hopefully this happens by increasing top line revenue growth and not merely from more cutting costs to improve the bottom line figures. With stock price valuations being higher now than they have been in many years, strong earnings and continued economic growth are needed to justify current prices. Last but not least, the U.S. Dollar is getting stronger which has a negative impact on US exports and profits earned by companies doing business around the world.
As we look at what’s happening overseas, it’s not as promising as in the US. The terrorism in the Middle East is unsettling to say the least, there’s still tension between Russia and Ukraine and protests in Hong Kong have made for some volatility around the world. As for the pullback last week, we need to look at the Eurozone’s economy flirting with another recession, France’s debt being downgraded by S&P and Germany’s unexpected weakness in manufacturing and exports. In addition, China is experiencing a slowdown which is affecting energy prices and commodities.
Year to date the Dow has erased all of its gains and is in negative territory, the S&P 500 Index is up 3%, Nasdaq is up only 2.4% but the Nasdaq 100 Composite (QQQ) is up almost 8%. Small Cap stocks as measured by the Russell 2000 in down 10%. Bond yields are the lowest they’ve been in a year and the 10 Year Treasury Note is yielding 2.25%. Most international investments are down year to date but continue to show better valuations than many domestic indices.
After three years without a 10% correction the recent volatility shouldn’t come as a huge surprise. Now may be a good time for investors who have wanted to get into the stock market to begin investing their cash. I don’t believe now is the time for long-term investors to be scared into selling stocks, throughout history the stock market has overcome much more than this and there continues to be enough positive news in the economy to keep us invested in the market.