Seeing Beyond Market Ups and Downs
Monday, November 2, 2015
“October was a stellar month for U.S. equities.
The Dow Jones Industrial Average and the S&P 500 jumped 9% and 8% respectively,
erasing large third quarter declines.”
-Standard and Poor’s Indexes
Despite the very recent good news, investors are still intimidated by market volatility. On August 24, 2015, the Dow Jones Industrial Average (DJIA) plunged 1,089 points in the first 10 minutes of trading. This was the largest intra-day point drop in the history of America’s oldest stock market. That same day it regained almost 1,000 points only to slip again and close down 588 points–a volatile day in the turbulence of the market. As an investor you might feel nervous about market volatility especially when the trend seems to be heading downward but reacting emotionally is never a good investment strategy.
What’s at the heart of this kind of severe volatility? Essentially three global concerns drive investors to running hot and cold: economic weakness in China, lower oil prices, and a strong dollar. At first glance lower oil prices and a strong dollar might appear to help the economy not hurt it. After all they are generally good for consumers but they can hurt some multinational businesses and negatively affect the economies of our trading partners. Economic weakness in China can hurt the prospects of countries that depend on exports to China which in turn can affect the global economy and potentially the U.S. economy directly as well as indirectly.
The looming threat of increased interest rates also worries investors. The Fed took a pass in September but most members of the Federal Open Market Committee anticipate raising the benchmark federal funds rate this year which would be the first rate change since December 2008 when the rate was set to near zero. Despite these headwinds, U.S. economic indicators bode well for the long term. Second quarter GDP growth was a healthy 3.9% up from the previous estimate of 2.3%. Consumer spending drove the overall increase but improved corporate profits also played a role.
Even though any market loss can be difficult to accept, it’s important to keep the numbers in perspective. The Standard and Poor’s 500 index (S&P 500) lost 9% from July 20 to September 24 but it was still up more than 185% over the last 6 ½ years. Getting out of the market during the downturn is tempting but it means you won’t be in a position to take advantage of growth on the upswing as many investors learned when they left the market during the recession. As we plan the next move, it’s wise to stick to the sound investment principles and proven concepts of diversified asset allocation used in building your portfolio originally in more nearly normal times.