Last August, U.S. equity markets corrected for the first time since 2011. The proximate cause at the time was weakness in China, potential action by the Federal Reserve and the declining price of oil. Through the fourth quarter of 2015, risk markets shrugged off these factors, recovering to levels within sight of all-time highs. However, as we closed out 2015, markets started to pull back again. That trend has continued into the New Year and has resulted in a very weak start to January.
The main causes of the current round of volatility are not that different from the selloff experienced in August: weakening growth in China, realized action by the Federal Reserve, and the continuing decline in the price of oil. An additional factor to consider is equity valuations which no longer contain any buffer for shocks. The market update A Weak Start for 2016 from HD Vest reviews all of those areas.
Market downturns can be frustrating and painful. Unfortunately, there is no method of market evaluation which has been proven to consistently predict a downturn, the depth of a downturn, or the ensuing recovery. Historically, diversifying a portfolio between stocks and bonds has provided the best method to reduce overall portfolio volatility. Through the current downturn, fixed income securities (bonds) once again are holding up better than equities and helping to limit portfolio downside. Attempting to time markets through a downturn has generally resulted in poor results for investors as most investors miss the turn in the market and end up reinvesting at market levels above their exit point. Beyond portfolio allocation, making sure that investors have adequate short term cash needs, perhaps 6 to 12 months of expenses, can help to delay the need to sell any assets through a down market.
Perhaps the best way to limit the pain of a downturn is to understand what the downturn means for your financial goals. If you have any questions or concerns about the current market volatility, please call our office.