Both stocks and bonds experienced increased volatility during the third quarter. Both markets were negative in July, positive in August, and negative again in September, ending very nearly even for the quarter. Conflicting economic data, much of which points to a U.S. economy running out of steam, was the primary culprit. Also causing concern among investors were geopolitical threats in the form of ISIS, renewed military action in the Middle East, and questions about the health of Europe’s economy. It was, needless to say, an eventful three months.
The question of the day is this, "Is this recent sell off and increase in volatility an opportunity to buy stocks before a rally, or a signal that more drops are coming?" There is no simple answer to this question. Recent market behavior is consistent with a short term bottom and it does not look like the longer term upward trend is in danger. Stock markets that have risen as much as this one with no meaningful pull backs often become volatile when economic data begins to suggest a slowdown in growth. At this point we feel the longer term bull market in stocks remains intact, but we will probably see an increase in volatility in the short term until the markets can see which way we are headed as an economy. At this point we are not making any changes to our asset allocation.
A couple of interesting facts: Over the past twenty five years, the S&P 500 has returned an average of 5.1% during the fourth quarter of the year. In fact, over that time period, almost one half of the market's total return has come during the final three months of the year. Also interesting: The projected earnings for the S&P 500 companies for this year are 66% higher than they were for the year 2007, the year before the financial collapse. When companies are able to grow their earnings, stock prices rise. This explains why the stock market is not expensive even though it has risen more than 150% over the past five years.
In a relatively long period of rising markets, it is our experience that investors often forget that markets sometimes go down. Whether this is the long awaited correction or just a minor bump in the road, a long term view of the markets is always the best view. We will, of course, continue to monitor economic events and will keep all of you alerted should our forecasts change.