by Don Gould

The following post is from an email sent to Gould Asset Management clients on August 24, 2015.  It is shared here for the benefit of our blog readers, in hopes it provides some helpful context for understanding the market’s recent volatility.

As you are likely aware, markets around the world have dropped sharply over the last four trading sessions. The S&P 500 benchmark of leading US stocks is down almost 11% from its August 18 closing level. In market parlance, this qualifies as a “correction.”

China’s surprise devaluation of its currency, the yuan, on August 11 seems to have been the catalyst for the decline. Many have inferred that the Chinese economy must be in worse shape than was previously thought. Given China’s outsized influence on other economies around the world, this is legitimate cause for concern.

The US market experienced panic selling at its opening this morning, dropping more than 5% from Friday’s close. The remainder of the session was highly volatile, with the market closing down about 4% on the day, but about 1% above its opening low point.

As investors absorb headlines from today’s market drop, we would not be surprised to see more panic selling at Tuesday’s market opening. But at some point, and we think soon, the panic selling will exhaust itself and investors will reconsider the market in a more sober, less emotional way.

No one can know at this time the extent to which China is slowing or the impact it will have on the world’s economies and financial markets. Time will tell.

What we do know is the following:

  • Developed economies, led by the US, continue to grow at a steady, if unspectacular, rate.
  • The stock markets of developed economies are at average valuation levels, viewed on an historical basis and taking into account today’s low interest rates. While there are instances of both bull and bear markets commencing at current valuation levels, we do not see an elevated probability of either at this time.
  • Notwithstanding a possible small Fed rate hike soon, monetary policy worldwide will continue to provide a supportive backdrop for “risk” assets such as stocks and real estate.

From a portfolio construction perspective, we also know the following:

  • “Corrections” and “bear markets” are inevitable by-products of equity investing.
  • We build our clients’ portfolios to make sure they can weather these storms, whenever they may occur. We do this through diversification across asset classes, and active rebalancing to make sure portfolios properly reflect client risk tolerance through time.
  • Your portfolio is almost certainly not 100% in the stock market and is likely down considerably less than the headlines might suggest.
  • Long-term success is more likely achieved by staying the course, rather than reacting to the market’s gyrations. Clients who try to sidestep downturns by jumping out at times like these may in fact avoid further declines. But in our experience, they rarely re-enter the market until it is at or, more likely, above the level at which they exited.

Finally, a bit of perspective is always helpful at times like these. The stock market has been a remarkable wealth generation engine for a very long time. We see no reason to think that reality has changed.

Factoring in the recent decline, the S&P 500, including reinvested dividends, has returned:

  • 57% in the last 10 years
  • 240% in the last 20 years
  • 911% in the last 30 years
  • 2,146% in the last 40 years
  • 2,083% in the last 50 years
  • 4,343% in the last 60 years

These stock returns were not “free.” The market’s “price” for these returns is the volatility and sometimes prolonged stretches of weak performance that we must endure along the way.

We recognize the emotional toll when markets get volatile and asset prices move in ways that are difficult to comprehend. We know it’s stressful, and take seriously our role as a steadying influence. We’ve been through these gyrations many times before and no doubt will experience more in the future. Remind yourself that your ability to keep your eyes focused on the long-term has generally been well rewarded over time.

Our job is not only to build your portfolio, but also to help you stay the course, especially when the market’s storms blow fiercest. Please don’t hesitate to call or email if we can be of help, now or anytime.