At the risk of stating the obvious, it has been a wild couple weeks for the stock market. Since August 17th, U.S. Large Cap stocks have declined by nine percent, wiping out all year-to-date gains. Foreign equities, especially those of emerging markets, have been hit even harder.
For the sake of a tidy story, the financial media always feels compelled to assign a reason to major stock market moves. This time, signs of economic weakness in China and concerns around a possible interest rate hike by the U.S. Federal Reserve are the purported culprits behind the stock market’s woes. Perhaps this explanation is accurate (it’s impossible to prove or disprove), but in the long run, the proximate cause of the correction isn’t particularly important. Times like these are healthy and necessary because they remind investors that the stock market’s attractive historical returns do not come without corresponding risk. Successful long-term investors demonstrate discipline by avoiding the herd mentality and taking advantage of occasions when stocks are “on sale.” As the Morningstar chart below depicts, strong equity markets are inevitably followed by downturns, the timing and magnitude of which are nearly impossible to predict. Corrections are a normal part of stock market cycles.
Perhaps this correction feels more gut wrenching because it has been four years since the last one. Back in August 2011, the causes “du jour” of the selloff were Standard & Poor’s downgrade of U.S. Treasury bonds and fears over debt crisis contagion in Europe. A scary environment indeed. Yet investors who stuck with their strategy during the summer of 2011 were richly rewarded, as the S&P 500 posted a 95% cumulative total return from October 2011 through year-end 2014.
By nearly all measures, the U.S. economy today is quite healthy. Unemployment is low, inflation is under two percent, and recent GDP growth has been better than expected. Corporations are flush with cash. Stocks around the world appear to be reasonably valued, with some pockets of the market starting to look downright attractive. Given this backdrop, we would urge our clients to tune out the noise produced by the frenetic financial media, and maintain their disciplined investment strategy. In the meantime, Dowling & Yahnke will be scouring client portfolios for rebalancing and tax-loss harvesting opportunities to make sure clients are well-positioned whenever the stock market resumes its long-term upward trajectory.