Yes, a Correction, Swift and Sure

Article by Dean Eisenbraun

For long-term investors, the best strategy may have been to spend August camped by a wilderness lake with no cell phone reception. The broad U.S. equity market, represented by the Standard & Poor’s 500 Index, started the month a few percentage points up on the year and ended it several points down. No cause for panic, and the time away would have been refreshing.

Those who stayed close to the market day to day may have had a different impression. As of the close on August 24th, the Dow Jones Industrial Average, Nasdaq 100, and the S&P 500 had all fallen more than 10% from their highs at the end of July, qualifying as a market correction. Historically, broad market declines of 10% or more, including those that turn into full-fledged bear markets, occur about every 18 months. But until August it had been nearly four years since a 10%+ correction, among the longest such periods on record.

Of course it wasn’t just U.S. stocks taking hits. Oil, copper, and other key commodities continued their steep sell-offs. China’s surprise currency devaluation (see accompanying article) prompted fears of competitive devaluations by other emerging market export competitors. And it fed growing concerns about weakness across the global economy. Equity investors in China as well as the U.S. saw some of their largest one-day moves, up as well as down, in several years.

Volatility, especially downside volatility, is often portrayed as the bane of investors’ existence. But it is the necessary companion to opportunity and usually reflects a sudden shift in perceptions more than a sea change in underlying realities. Either way, it’s not a bad time to check your portfolio’s participation in that volatility and your relative comfort with that positioning.

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