Content provided by Case Eichenberger, CIMA, Client Portfolio Manager
What’s scaring market participants today? Will this be known as the China
scare of 2016? The oil crash of 2016?
It’s always hard to blame market turmoil on one event, but slowing global growth is usually a culprit. When combined with slumping demand for oil/an overabundance of supply, Fed tightening, and an election year, we have a lot of uncertainty. And markets hate uncertainty.
First, let’s review what we’ve seen. We are within the range of a normal market correction that typically occurs once per year. On average, peak-to-trough, the S&P 500 has experienced intra-year declines of 14%, in line with the current environment. The stock market doesn’t pay much attention to the calendar; just because this is occurring in January is more or less meaningless.
Typical stock market corrections between 10-20% take just four months on average to recover. And market corrections and volatility can create opportunity. For example, accumulation investors, who are adding money to accounts consistently, benefit from investing at more attractive price levels. Income-focused investors benefit from reinvesting, and all investors can benefit from opportunistic rebalancing.
Volatility is the price of admission for financial markets. The decline we’ve seen this year feels more uncomfortable because of the speed at which it happened and because we’ve recently experienced historically low volatility. We expected volatility to rise, and it definitely has. CLS Chief Strategist, Scott Kubie, CFA, told Yahoo Finance recently:
“Volatility matters, because it is an emotional cost to investing that can lead to reduced performance. It also matters for fundamental reasons, because volatility often expresses—and magnifies—a real risk that could lower long-term returns.
“The good thing about corrections is they create opportunities. We are looking for asset classes where the selling pressure has pushed prices below fair valuations and where fundamentals are attractive. Most equity asset classes have fallen in line with their risk during the recent decline.
“CLS sees opportunity in rotating toward factor or smart-beta ETFs that offer exposure to the types of stocks that typically outperform in the long run. International markets that benefit from lower oil prices also provide potential price gains.”
And in the words of the well-respected investor Benjamin Graham:
“In the short run, the market is a voting machine but in the long run, it is a weighing machine.”
Day-to-day market actions are driven heavily by random noise and behavioral biases, causing dramatic over- and under-reaction to new information. In the long run, market performance reverts to fundamentals and valuations. Although CLS projects slower growth ahead, we are not anticipating a recession. And although energy companies may struggle, we foresee earnings growth turning around in 2016.
During the debt crises in 2011, the market was down about 20% during the year. As scary as that sounds, what have we seen since? 2011 ended about flat, before dividends, and the market has been up more than 70% since the pullback – still a very good time to be in stocks and not in cash.
In times of market crisis, we’re reminded that it pays to stay disciplined with asset allocations and diversify to a comfortable risk score.
CLS is watching these market occurrences every day in real time. We monitor each of our client’s accounts to make sure they are taking on the appropriate amount of risk they signed up for. If risk becomes too high or too low, we make allocation adjustments to maintain the level of risk our clients are comfortable with.