It has been an exciting week, to say the least. Last week the S&P 500 was down 5.63% only to slide down another 5.9% yesterday. This makes it an official correction as markets were down 10% or more.
It is reminiscent of October 19, 1987 (Black Monday), when the Dow fell 22% in one day. This scared a lot of people, but even after that event, the year ended up positive.
When the stock market goes through wild freefalls like we saw this past week it can bring fear into the hearts of many investors. And, of course, that is the very reason we have these periods of excessive volatility. The markets are often driven by emotions – fear or greed, depending on the direction it is going at the time.
We fully realize these serious market drops can bring questions into the mind of our clients:
How far can it go?
Of course no one knows how far it will go. Though we are experiencing a rebound today, we could still see more downside, since the recent activity has been driven by emotion as opposed to fundamentals. However, the fundamentals of the economy haven’t changed. We’re still looking for a positive GDP this year. Corporate profits, though weaker due to oil prices and the strong U.S. dollar, are still expected to be much stronger next year.
What are we doing about it?
Some wonder if we will pull out of the market when we see these things coming over the horizon. Unfortunately, no one can predict this kind of volatility. In the past we have worked with managers who have claimed to have crystal balls, but experience has shown it is never a successful strategy to try to pull out and wait for a recovery.
Our job is to carefully design portfolios matching your risk profile and return requirements. Once this design is in place we work diligently with our research analysts to select and implement the most suitable managers for each mandate in your portfolio. We monitor each manager very closely to see they are meeting our objectives.
With all this in place, we are not overly concerned over the volatility we have seen this past week. We know each of our chosen managers will be doing what we have hired them to do – minimize loss where appropriate, yet be there for the rebound.
If anyone has specific questions regarding their individual situation, please give us a call.
Max W. Smith, CFP®, CIMA®
Kent G. Forsey, CFP®