About a month ago we published an article called “Perspective on Recent Market Volatility”. It spoke of the volatility in the market and our thoughts related to such volatility. It was basically a view that said economic fundamentals were still in place to keep the market on track, albeit with increased levels of volatility since we are nearing the latter stages of the longest recovery in global market history.
You may recognize Chart #1 from previous commentaries. It shows the growth of the S&P 500 since the low in April of 2009. We have marked downward moves greater than 5%. As you can see, there are seven times the move was between 5% and 10%, and five times with a move greater than 10%. So far, our latest move downward has not breeched the 10% level yet. And therein lies the biggest challenge for investors. Hindsight is 20/20, but any move to de-risk portfolios when the market went down between 5% and 10% would’ve been a mistake where an investor would’ve been whipsawed and lost value on the upturn. This is why we typically are not going to de-risk before markets move down less than 10%. The really tricky part is when markets decline by more than 10%, because until you breach a 20% downturn, you are still just in correction territory. Looking at Chart #1 again, you would’ve still been wrong to de-risk during any of the moves greater than ten percent. The difference now is that we are much longer in the recovery than we were during other downturns. Inflation is higher, yet still within the Fed’s comfort zone. Unemployment is very low, yet not causing a spike in wages. Corporate profits are at an all-time high yet look vulnerable to a reduction in growth during the next few quarters.
The bottom line is that portfolios have done tremendously well since the bottom in 2009. While volatility is returning, it is too early to call an end to the bull market in stocks. It is very uncomfortable to see your portfolio wander into negative territory for the year, but also realize that markets can’t go up forever without some healthy corrections. We are in purgatory right now (down just about 10%) and waiting to see if we travel further down into that very uncomfortable real estate between 10% and 20% down, or if we stabilize and continue our ascent. We have diversification which helps very much during downturns, we hold a higher percentage of cash than normal, and we will be diligently analyzing economic fundamentals, valuations and price action to determine our next moves (if any). For now, no matter how uncomfortable it may seem, we believe the prudent move is to wait and watch and evaluate.
Jonathan D. Smith, CFA – Chief Investment Officer, DT Investment Partners
Note: DT Investment Partners’ commentary discusses general developments, financial events in the news and broad investment principles. It is provided for information purposes only. The material represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. Investments in various asset classes entail different investment risks. For example, small cap equities tend to be more volatile than large or mid-cap equities. International equities and emerging markets have exposure to currency fluctuations, foreign taxes, political instability and the possibility for illiquid markets. Fixed income investments involve interest rate and credit risks among others. Real estate investing includes risks such as declines in value of real estate, changing economic conditions, tax laws or property taxes. Commodities’ investing is highly volatile and subject to changing economic conditions and the vagaries of speculators among other risks. Further, diversification and strategic or tactical allocation do not assure profit or protect against loss in declining markets. Index performance returns do not reflect any management fees, transaction costs or expenses. One cannot invest directly in an index. Past performance does not guarantee future results.