Six months ago, on August 15, 2011, I wrote the first of a series of Insights on how investors might deal with market volatility by better understanding their own situation and cash flow needs and then building portfolios with that knowledge in mind. Over the course of the four-week period that I posted those articles, the S&P 500 bounced up and down like a rubber ball, but actually ended the four-week period within a few points of where it started. Of course, those four weeks don’t really explain 2011 at all. Between the market’s top in the first half of the year and its bottom in late September, the S&P 500 lost almost 20%. However, from the beginning of 2011 through December 31, the S&P actually posted a 2% gain. Unfortunately, investors who pitched in the towel late in September as the airwaves filled with talk of an impending double-dip recession caught the bottom perfectly. From October 1, 2011 through the end of the year, the S&P gained 11%. It was a wild ride indeed.
Is all of this volatility normal? The day-to-day volatility of the equity markets has increased from what we experienced in the 1990s. Oh, wouldn’t we all like to go back to that decade – before everyone had a cell phone and a constant internet connection? The period between 2004 and 2006 was also fairly calm. But if one were to go back and study the U.S. equity market, one would see that periods of high volatility are not uncommon, and volatility is always elevated around periods of recession. Why? Uncertainty is higher when the economy is struggling, and equity markets do not like uncertainty. Today, that uncertainty is magnified by the interdependency of the global economy, some real and some alleged. Additionally, there is the unending stream of news, some real and some not real at all. How many of you saw/read/heard that oil prices jumped dramatically late last week because there was an explosion at an oil pumping station in Saudi Arabia? They dropped almost as quickly by the time markets started trading on Monday. The story, it was later revealed, was false.
So where are we today? Very tired of Greece for one thing. No offence intended to anyone of Greek heritage. I am referring only to the headlines on March 6 blaming the first real down day since the beginning of the year on Greece again. It could be any country though – according to the talking heads, China started the slide on March 5 by announcing a lower-than-expected growth target for 2012. But seriously, I still believe everything that I wrote in late 2011. If you are suffering from volatility fatigue, please take a few minutes and read the “Hang in There” series in order. It is still posted at www.sdwealthmangement.com.
The U.S. economy is once again improving from the slowdown experienced during 2011. Interestingly, in her most recent market update, Liz Ann Sonders, the Chief Market Strategist for Charles Schwab & Co., sees a double recovery for the U.S. (the U.S. is entering the second stage of its own recovery), not a double-dip recession, on the horizon. The slow-but-steady pace of an improving job market also bodes well for the economy. Even with an improving economy, the U.S. cannot help but be held captive to the events around the world, so expect 2012 to be just as exciting as 2011. As Benjamin Graham once reminded investors, “In the short run, the market is a voting machine and in the long run it is a weighing machine.” Hang in there.
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