The lack of volatility and the run-up of the S&P 500 over the last year and a half has created a false sense of security regarding normal market behavior. Despite seeing the second 5% correction in the S&P 500 this year (we expect three in a typical year), the index for the year has delivered a total return of 3% through October 13.
There are many factors that have led to the most recent sell-off, including:
- Ebola outbreak in Africa
- Unrest in Syria
- Slowdown in China
- Japan slipping into a recession
- The E.U. about to start a Quantitative Easing program of their own
Quarterly corporate earnings announcements, which begin this week, may ease some of the volatility in the markets; however, if early earnings reports do not come in as expected, there may be further market declines. Relative to the rest of the globe, the U.S. economy remains strong.
The average stock market decline going back to January 1, 2010 was -8.33%, while the average recovery during the period has been +14.34%. As the chart below reminds us, you have to expect volatile periods in the stock market, but that should not dissuade you from investing money for the long-term.
It is normal to have market downturn periods of 5% and 10%, but they are generally short-term in nature. In our view, these present good entry points for building positions. We expect stocks to be a good source of long-term returns and one of the best ways for investors to keep ahead of inflation (the biggest risk to investors in our opinion). That said, it appears we have entered into a time where volatility is returning to normal levels and investors should not be surprised to see bigger price moves up or down in the future.Some trust products and IRA contributions/balances are not a deposit, not FDIC insured by any federal government agency, not guaranteed by the bank and may go down in value.