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Market Volatility: Keeping a Long Term Perspective

By:  William J. Hufnell, CFP®, CPA / Bay Point Wealth Management

We are sending out this market/economic update due to the recent increase in volatility in the equity markets.

After a sustained period of relatively low volatility in the markets, we have seen in the last few weeks a material increase in the volatility of security prices and a fairly quick decline in global stock markets, averaging about 8% decline in the past month.

As often is the case, there are several factors that we believe are causing the recent volatility.  Primarily, we believe these factors to be:

  • Concern over the Ebola virus spreading and potentially becoming a pandemic.
  • Expectations/forecasts for economic growth (particular in China and Europe) be revised downward.
  • Geopolitical concerns, particularly with respect to ISIS and Ukraine.
  • Continued uncertainty regarding monetary policy, in the US as well as abroad.

Each of these issues deserves attention and should not be “down-played.” However, each year there will usually be some major issue with which we need to contend. These issues typically seem worse when they are happening and can cause exaggerated moves in security prices. If you look back in history, you can likely remember many of these events and the emotions we felt at that time.

Our approach is not to let short-term market swings effect our investment approach – and when appropriate, use lower prices to add to certain holdings and re-balance portfolios based on each client’s needs.

We continue to believe that the longer-term prospects for global economic growth are intact. Therefore, we believe in maintaining our longer-term focus and related investment allocation. We also believe the equities we hold (mainly through mutual funds and exchange traded funds) on average will continue to grow and we will reap the benefits of this long-term growth potential. Shorter-term swings in the prices of these holdings do not deter us from this strategic view.

Additionally, and contrary to some of the more negative news reports that we have seen recently, there are also some positive factors that need to be considered. These include:

  • The US economy appears to be fundamentally sound. While growth has not been spectacular, it has been steady and we have been seeing signs of improvement in new job creation and the unemployment rate.
  • The price of oil has dropped about 20%. This allows consumers to have more cash to spend (or save) and reduces operating costs for many businesses.
  • Interest rates have fallen (again) – the US Government Bond is yielding below 2.20% this week – after starting the year above 3.0%. This is (generally) good news as it lowers the cost of borrowing for consumers and for businesses. Additionally, mortgage rates have followed suit and are again at exceptionally low levels, allowing homeowners to significantly reduce their interest costs. By way of example, we recently locked in a client with 2.25% on a 10-year fixed rate mortgage.

However, the one challenge that we currently have with respect to interest rates is generating income from our bond holdings. With rates being at pretty much historic lows, savers are clearly penalized since the return generated from the fixed income portion their portfolios is quite low.  We continue to look for prudent solutions to help increase this yield, without taking too much risk.

I would also like to comment on how the media generally reports the news on the market. Unfortunately, there is a very strong tendency of all media outlets to sensationalize market sell-offs. Have you ever noticed that when the market goes up significantly it makes the front page of the business section of the newspaper but when the market goes down significantly, it makes front page news?

Finally, we are asked occasionally what we think the “market is going to do” or “where we think it will end the year.” Predicting moves in the stock market on a consistent basis and particularly over shorter time periods is pretty much impossible. Those that have done it in the past have consistently been embarrassed by their next wrong call. So while we realize there is generally more comfort hearing an answer to these type questions – at best the answer would have to be a guess. This, by the way, is what every talking head on CNBC is doing – they are making a guess.

In summary, we remain confident in our investment philosophy and asset allocation strategy. We also remain positive on the long term outlook for our portfolio holdings.  As always, we continue to manage each individual portfolio based on each client’s needs. If we do have further decline in the markets, we will continue to evaluate our positions and look for opportunities to add to our holdings at lower prices.

Please call me if you would like to discuss your portfolio or if you have any questions.