September Volatility - A Reason to Panic?

The answer to that question at least 99% of the time is resoundingly, "No!"  This time is no different. 

On Friday, the S&P 500 Index fell 2.4%; and, of course, we heard the usual exaggerations from the press about a possible “panic.” Perhaps, the media had merely been lulled into a sense of boredom as the markets have been relatively quiet over the summer and even into September – historically, the most volatile month for the markets. True, Friday was the first volatile day by any measure in some time; however, the notion that the markets were being "shellacked" is no small amount of hyperbole. As opposed to a full-blown panic, we would describe it as a “rounding error.” If ~2.5% is going to send the press to their thesauruses, we will be interested in their colorful description of a 10% correction – which, by the way, we are overdue for. Our noun describing such occurrences is opportunity

And, of course, the market rebounded on Monday and fell back on Tuesday to where it had closed on Friday. [The term on The Street for a three-day period like that is a “dead-cat bounce.”] Besides Mrs. Clinton’s health scare and the fact that a British Special Air Service (SAS) sniper had taken out an ISIS executioner from a mile away, there must not have been much news; so, the focus shifted to speeches by two Federal Reserve Governors in advance of their policy board meeting this week. We’ll learn the outcome of that Wednesday afternoon. 

For seasoned investors, a 2% drop after a very long market calm simply means a return to normal volatility. This is generally good news for investors because volatility has historically provided more upside than downside, and because the occasional downdrafts provide a chance to buy stocks on sale. In addition, with our clients, we are always looking for opportunities to harvest losses for tax benefits. 

We don’t know whether the Federal Reserve will raise rates, nor do we know how that will affect the market. What we can say with certainty is that there have been several temporary “panics” during the bull market that started in March 2009. Selling and remaining in cash at any one of the dips would have locked in losses and prevented the opportunity to ride the historical “up and to the right” trend. [Even with the Tuesday downturn, the S&P 500 is only down 3% from its recent, record highs.]

Historically, investors who attempt to time the market run the risk of missing periods of exceptional returns, leading to significant adverse effects on the ending value of a portfolio. The graph below illustrates the risk of attempting to time the stock market over the last 20 years by showing the returns investors would have achieved if they had missed some of the best days in the market. Although the market has exhibited volatility, over the long term, stock investors who stayed the course have been rewarded.

Note the impact of just missing the best 1% of days during this period – an 11.4% swing in one’s return over a twenty-year period. Lesson re-learned: Time in the markets; not, timing the markets…

The U.S. economy is, in fact, not showing traditional signs of collapse. Job creation is stable, inflation is low, and real wages/savings are on the rise.

We understand it can be easy to get caught up in the emotional swings of the market. Our mandate is to help our clients control what they can control: ensure cash reserves are adequate for short-term needs, manage positive cash flow, maintain low debt ratios, identify and invest the amount needed for the medium-term portfolio in appropriate instruments, and allow the long-term portfolio to remain well-diversified. We monitor progress toward reaching goals and assist with critical decisions along the way. Clearly we cannot control the market, but we can take advantage of the downturns and feel confident knowing that we are implementing a disciplined strategy.