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Today the S&P 500 opened down about another 3%. Adding in declines from earlier this month, that makes for a correction of about 10% since the market peaked in May at S&P 2,130 and then again in July at about the same level. Historically, the market gives us on average a 10% correction every year. The long term return on the stock market as measured by S&P 500 is over 9% annually, but each year or so we have these corrections. This time around, however, we had not really had a 10% down move since early 2012.
Therefore, the present sell off in risk assets so far falls into the category of normal and could actually be considered ‘healthy’ (although it never feels that way when it is happening) as speculative investors are flushed out. On the positive side, although emerging markets and China in particular have been slowing, the U.S. economy continues recover as evidenced by a strong housing market and steady employment gains. Europe also continues to slowly recover although the region’s progress remains bumpy and uneven at times. On the commodity front, oil prices continue to fall, which has received some negative news headlines lately. But the reality is that lower oil and gas prices are ultimately good for both U.S. and global growth as lower prices effectively represent a tax cut for consumers and many businesses.
Overall, we remain optimistic about higher quality ‘risk assets’ from this point forward, although it could take some time for markets to settle down. Many so-called ‘technical support levels’ have been breached and we are going into a seasonally challenging period. Thus, the likely back and fill process may take some time to play out.
In the meantime, we remained focused on high-quality, larger cap companies exhibiting wide moats which give them a sustainable competitive advantage. We remain overweight the U.S. as the ‘best house in a tough neighborhood’, although we continue to nibble at Europe and Japan on dips. In the bond funds we have recently added to select credits as the spreads between government and corporate issues continues to widen despite the improving fundamentals in most of our underlying companies.
The information contained in this article is for information purposes only, and represent the views of the author. It is not intended as specific investment or financial advice, or a recommendation or solicitation to buy or sell any security. Any investments or strategies listed in this article may not be suitable for all investors. Past performance is not indicative of future performance, and as with any investment, prices may fluctuate. It is recommended that advice is sought from a qualified investment professional prior to implementing any financial plan. LOM has made every effort to ensure that the contents herein have been compiled from sources believed reliable, however LOM does not warrant the accuracy, adequacy, timeliness, or completeness of this information expressly disclaims liability for errors or omissions in this information.
