I want to give you a brief update on the markets as of yesterday’s close. Primarily, I want to answer the one question that is on the mind of many clients when they see the last few days of market news — “Am I okay?”
Since August 1st, U.S. and global stock markets (ACWI) have officially entered a “correction” with a decline of -10.81%. Nearly all of this decline, -9.44%, has occurred since Wednesday of last week. We have had much sharper declines in even shorter periods of time historically, but this time is sufficiently sharp to create a financial media frenzy.
The decline has been broad, impacting nearly all global markets, real estate, and commodities. The only significant exceptions have been the U.S. bond market (AGG) +0.61%, long-term U.S. Treasury bonds (TLT) +2.28%, and gold (GLD) +3.19%, from last Wednesday through yesterday. (See the chart below comparing ACWI, AGG, TLT, GLD)
The reasons for the selloff (and the wild swing up and down during the day) are as numerous as the pundits who claim to know such things, with most focusing on China’s declining economy, market and currency. We even had a mid-day rally on news of a private letter from the CEO of Apple, Inc. to television stock-jockey Jim Cramer. (Really? Is this how people invest?!)
Conspicuously absent from the noise so far is any spokesperson from the Federal Reserve, conveniently hinting that just maybe they won’t raise short-term rates in September after all, and perhaps even embark on further market operations (QE4 anyone?). We’ll see — such a speech will not surprise me. In the past, such interventions have caused dramatic upturns in the market, and we could easily see it again. But at some point it will stop working (or the Fed will refrain), and we’ll enjoy a healthy decline in asset prices that makes the last three days look like child’s play.
The real reason for the recent selloff is that this is normal market behavior. This is how healthy capital markets function, and it is how intelligent long-term investors find opportunities to actually invest — buying assets that have real cash flow and intrinsic value at prices that enable us to achieve a reasonable rate of return on our investments over time. Investing profitably is hard to do when asset prices are at the highest relative valuations in history. Periodic market corrections and bear markets fix this, and create opportunity for investors.
Why It Matters
Of course, hearing that this is “normal” and creates opportunity is little comfort if you are afraid of running out of money during retirement, or not having sufficient assets to care for those you love. This is what clients mean when they ask “Am I okay?”. It’s not the dollars and percentages that matter, it’s the goals and needs that those dollars represent.
So the short answer is yes, you’re okay even when the market falls 10%. And if we need to visit that together one-on-one, then let’s do it. I wake up every day with a keen awareness that my professional work matters greatly to the families and organizations I serve, and whether the market continues to decline from here or sharply rebounds, I carry the weight of personally knowing your goals and needs and what it takes to meet them.
While the small losses this month are no fun, and flat year-to-date and low one-year returns are nothing to get excited about, I am very pleased that our strategies and efforts are working to preserve client assets during the events of the past several days. As properly functioning markets continue to create opportunities, we are well positioned to achieve your most important goals.
If you have any questions about your individual portfolio, or need to revisit the financial planning goals the portfolio is designed to support, please send me a note or call me.
I hope you have a great week!