Market Update August 24, 2015

We wanted to touch base with you in regards to the market volatility we've seen this year. After a very range bound 2015, meaning mostly flat for stocks and bonds, these past few days have thrown us an additional dose of market volatility.  To be clear, this current environment is not 2008, 2009 all over again. So far, the S&P 500 is down approximately 8% from its all-time high, getting closer to "correction" territory.  The selloff is due to a confluence of events:  fears of a slowdown in China, currency devaluation from emerging market countries (China, Vietnam, Kazakhstan, etc.), and uncertainty about the Fed's pending rate decision.

All of that said, we have written numerous articles on the importance of corrections.

It's important to remember that corrections are a common, important, and even embedded feature of the stock market. They act as a natural circuit breaker for the market, and a mechanism to curb excessive speculation (not that it always works). They occur along with or in anticipation of bad news like a slowing economy, recession, or political turmoil.

Historical market data going back to 1928 helps us understand the average timeline for corrections. On average, the stock market corrects 5% every 10 weeks, 10% every 33 weeks, and 20% (also considered a bear market) every two and a half years.

Our research shows that the market has not seen a full 10% correction in 46 months (the 3rd longest in history). In other words, we're due.

Despite being due for a correction (and very close to reaching correction territory), we should not fear it. We recommend that investors remember three things when a correction hits:

  1. Corrections are normal - The stock market doesn't go straight up forever. Downward movement and "consolidation" are normal parts of a healthy market system. Think of the market like a clock's pendulum - it has to swing both ways.
  2. Now is not a time to panic - We know that the best course of action is for investors to keep a balanced, well-diversified portfolio, so in times of correction you have a buffer against losses; which Wela portfolios are designed to do.  As long as you are properly balanced, you have to trust your original investment strategy despite market swings.
  3. Corrections are Temporary - Since 1965 markets that correct between 10% and 20% take less than 6 months to recover.

Bottom Line 2015 has clearly been a volatile and frustrating period. Ultimately, though, today's market moves are a great reminder of why a balanced portfolio between risky and safe assets is key.