Commentary on Recent Financial Market Volatility

Over the past several trading days the stock market as reflected in the S&P 500 index has declined pretty sharply in a short period, about 8% since the intraday high reached on July 16. The reason for the decline is primarily investor concerns over the July employment data (issued last Friday) that appeared to reflect surprising weakness in the labor market. Some investors are concluding that the soft data seen on Friday reflects a broader weakening in the economy and that the Federal Reserve will be too late in reducing interest rates to stave off a recession. In addition, today’s 3% decline was exacerbated by a large decline in the Japanese stock market which we believe had some spillover effect on the U.S. stock market.
    
There are a few observations we’d like to share. First, stocks are inherently volatile. Their volatility has been shown to be a necessary attribute to the higher returns that stocks have historically provided. Second, we would note that a decline of 8% is well within the range of a normal pullback. Pullbacks and corrections are normal for the stock market, occur on a regular basis, and need not be interpreted as a foreboding of something dire. Third, when looking at July’s net new jobs number of 114K, it is true that the number was on the “weak” side; however, this series can be volatile from month to month. The 0.2% increase in the unemployment rate was also somewhat distorted by an unusually large jump in new entrants to the labor force. The point here is perhaps the July employment numbers are not necessarily as dire an indicator of the economy as some may be interpreting. Time will tell and we will be watching the data.

With regard to your investments, I would mention a couple of things: a) we believe it is too early to make a call on a “recession” and we do not believe the economy is in a recession currently; b) the stock market often over-reacts to data which we believe it is doing now; and c) in any event, we would never advocate trying to time the market based on short term volatility. We have always advocated a “stay the course” strategy with an appropriate asset allocation that is determined from your financial plan. Your plan and investment strategy already take into account expected market volatility. If one’s strategy and allocation are appropriate, there is no reason to attempt to time the market or be overly concerned about short-term volatility in the financial markets.