The Daily Difference: Healthy Correction or Something More?

“One of the funny things about the stock market is that every time one person buys, another sells, and both think they are astute.” -William Feather Following this week’s steep selloff in global equities, it is important to share our current thinking, provide perspective on these types of moves and what, if anything, one should be doing about it.

As shown in the chart of the S&P 500 below, Friday capped a very tough week for equities. U.S equities were down over 5% for the week, 7%-10% from the highs in May, and are now down approximately 3% for the year.

S&P 500 Chart 8-24-2015 The U.S. equity markets have not experienced a 10% correction in more than 3 years, something that generally occurs every 15-18 months. While these movements are unsettling in the short term, they are very normal over the course of market history. Markets do correct and lately the overreaction to news of all kinds has been the catalyst for this move. We are of the belief that this pullback represents an opportunity as markets reprice and refocus on fundamentals. As shown in the chart above, investors have become accustomed to a very low volatility, relentlessly rising market. Is the bull market that started in 2009 coming to an end and is the economy headed into a recession? We don’t believe so and below are a few data points to support our position:

-     Personal and corporate balance sheets are the strongest they have been in years -     Household debt service as a % of income is the lowest it has been in over 25 years -     Household net worth continues to expanded meaningfully -     Employment levels remain very high, our economy has created 12.4M jobs since the recession, where 8.8M jobs were lost, and jobless  claims sit at multi-year lows -     Commodity price declines have created serious issues in some areas of the economy, but it also puts real money into the pockets of  consumers -     Real estate values along with housing starts are up meaningfully -     Revenues and earnings by S&P corporations continue to impress and currently sit at all-time highs

All of these data points suggest a strengthening U.S. economy, not one that is running into problems. There are many negatives of course, and there always are. Issues in China certainly are concerning, however we find it difficult to arrive at the conclusion that the bull market in equities is over. The global news regarding commodities, currencies, and Chinese markets has unnerved and distracted investors from what is happening here at home which is a very quantifiable set of economic data that has continued to improve over the last several years. We were long overdue for a correction of this magnitude and do not see the usual indicators of a recession.

Our investment committee meets weekly and discusses the markets, and portfolio allocations. At this point, we are not making any changes to our allocations based upon market volatility and view the current environment as a good opportunity to begin putting cash to work in select areas and re-balance portfolios. We are watching events overseas and in the commodity markets closely, if we believe that those events require a modification to our strategy and your allocations then we will quickly do so. As always, please don’t hesitate to ask any questions.