Position on U.S. Markets
Well, it’s that time of year when emotions are beginning to run high. I can tell because we start getting phone calls and emails from our clients. It’s hard to ignore the sensationalistic pundits on CNBC arguing over whether Greece will bring down the global economy or how the New York Stock Exchange’s 3-hour technical glitch could trigger a market crash. Indeed these are scary times.
Let’s all just take a breath and look at the facts. First and foremost, the S&P 500 Index has had a minor pullback from its all time high level of 2135 and now sits at 2046, a drop of 89 points or 4.2%. It is also important to note that in most calendar years, the S&P has one technical correction of 10% or more. We just missed the 10% mark last October, but haven’t seen a true correction since the latter months of 2011. Not only is market volatility normal, but necessary and healthy. Without pullbacks, markets would go straight up and then come crashing down. Try to think of a healthy market in a two steps forward, one step backward pattern.
Right now, we are in a backwards phase and it may get worse before it gets better. With the likelihood of an interest rate increase sometime this year and the next Presidential election on the horizon, we feel volatility will be the norm going forward. Something else to consider: if you are invested in a diversified portfolio, you will not be exposed to the full downturn of the equity market during these pullbacks. In other words, you have a level of safety built in. As long as the economy and corporate earnings look to be stable, we use these pullbacks as buying opportunities.
Over the last eight months, it is really interesting to see that with all of the volatility and headline news, both the U.S. stock and bonds markets have essentially broken even. Returns have been difficult to come by as the markets have been digesting the end of quantitative easing, a rising U.S. dollar and falling oil prices.
It is our base case scenario that earnings and GDP will show improvement as we move into the 3rd quarter offering support for higher equity prices. Additionally, valuations on stocks are not frothy. They are fairly valued and still represent the best place to invest for returns over bonds and cash.
Over my 20-year career, I’ve seen my share of market volatility with periods of uncertainty. It is imperative that we look at investing as a long-term undertaking based on each investor’s goals and risk tolerance, so hold on and try to enjoy the ride.
Richard Siegel, CFP®
Managing Partner, ARQ Wealth Advisors, LLC