Markets Correct. Thank Goodness!

By Jonathan Scheid

 21-Aug-1514-Aug-15Weekly% ChangeYTD% Change12 month %Change
S&P 500 Index 1,970.892,091.54-5.77%-4.27%-0.88%
Dow Jones Industrial Average 16,459.7517,477.40-5.82%-7.65%-3.18%
Nasdaq Composite 4,706.045,048.24-6.78%-0.63%3.69%
Russell 2000 1,156.791,212.69-4.61%-3.98%-0.31%
MSCI EAFE (Intl.) 1,756.651,840.94-4.58%-1.03%-8.72%
10 Year U. S. Treasury Yield 2.04%2.20%-7.27%NANA
30 year U.S. Treasury Yield 2.72%2.84%-4.23%NANA


Stock markets around the globe experienced a substantial decline in value over the last week and that volatility has continued into this week. In the U.S., the recent decline in the Dow Jones Industrial Average officially qualified as a correction (i.e., when an investment declines 10% or more off of a recent high) and many other indexes aren’t too far off similar sized declines.

We know that market volatility can be unnerving and sometimes scary. Keeping perspective on how markets operate may not be the most comforting advice, but it is often sound advice. Volatility is part of investing. We talk with investors on a regular basis about how markets rarely move in a straight line, but they have historically gone up more often than they have gone down.

Additionally, we talk to investors about how risk and return are related. If we want greater returns over the long-term, we have to be willing to tolerate some level of volatility. The volatility we are seeing right now is fairly normal by historical standards. It may seem hard to believe, but when we look back to 1900 on the Dow Jones Industrial Average, there has been a 10% decline on average about once a year (source: American Funds). If there has been one abnormal fact about the market recently, it is that there hasn’t been a decline of 10% or more since October 2011.

The cause of market volatility is always different. Over the summer we were concerned about Greece. Last year we heard about the strengthening dollar hurting U.S. corporations and before that we were confronted by Ebola and the conflict in Ukraine. The cause of this bout of market volatility stems from investors’ concern over global growth, the return of deflationary pressures and the possibility of the U.S. Federal Reserve increasing short-term interest rates as early as September.

Last time we checked, the U.S. economy is doing fine. It continues to grow at a reasonable rate, the unemployment rate continues to decline and our manufacturing and service sectors are expanding. Additionally, most U.S. corporations are healthy and managing the slow and steady growing economy fairly well. Corporations are buying back stock, increasing dividends and participating in mergers and acquisitions.

We’ll end this commentary with two quotes. The first is one of our favorite quotes from a talking head on television that asked a very valid question: “Do you think Warren Buffet is selling stocks right now?” That really brought it home for us. The daily news cycle gets us focused on trading (i.e., buying and selling over and over again). However, we are not traders trying to ride every market wave. We invest to help realize our long-term goals.

The second quote came from behavioral economist and University of Chicago professor Richard Thaler where he posted the following to his Twitter account as a way to deal with market volatility: “Inhale, exhale. Repeat. Then watch ESPN.” In addition to his comment, he posted a graph showing the growth of the S&P 500 Index over the last 10 years and how this recent decline only represented a small dip in its upward trend. Keeping the long-term perspective has historically served investors well.

Coming Up: On Thursday, second quarter 2015 U.S. GDP is expected to be revised higher (to 3.2% from 2.3%) (source: WSJ).

The views and opinions contained herein are those of Bellatore Financial, Inc. and have been researched and analyzed by Jonathan Scheid, CFA, President & Chief Investment Officer.

All Indices are unmanaged and are not available for direct investment by the public. Past performance is not indicative of future results. The NASDAQ Composite Index measures the performance of all issues listed in the NASDAQ Stock Market, except for rights, warrants, units, and convertible debentures. The S&P 500 is based on the average performance of the 500 industrial stocks monitored by Standard & Poor’s. The Dow Jones is computed by summing the prices of the stocks of 30 large companies. The Morgan Stanley Capital International (MSCI) Europe, Australia and Far East (EAFE) Index is a broad-based index composed of non U.S. stocks traded on the major exchanges around the globe. The Wilshire 5000 Total Market Index represents the broadest index for the U.S. equity market, measuring the performance of all U.S. headquartered equity securities with readily available price data. Capital Allocation & Management is a managed money program offered through Bellatore Financial, Inc. 14.115.c.9.14