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Market Commentary 09/30/2015

Investor Fatigue amidst Uncertainty

After several years of strong average returns and low volatility, investors took a step back this quarter with broad markets having their weakest performance since 2011. A slow drip of conflicting economic reports and poor performance has started to wear on some investors. For many the reaction can be to get rid of their “risky” investments and flood into the “safe” ones. We see some individuals showing early signs of investor fatigue, which essentially is the opposite of investor enthusiasm. As investors, this behavior tends to work against us, so the recent volatility serves as a timely reminder that markets rarely move in a straight line and opportunities come out of markets like this.

It may not feel like it, but this latest market correction is a typical and even welcome event in a bull market that has lasted nearly six years. Many market watchers had been saying it was time for a correction—not necessarily because economic fundamentals warranted it, but rather because we hadn’t seen a 10% correction since 2011.According to S&P Capital IQ, a correction of 10% typically happens once every year and a half. After the market bottom of March 9, 2009, the S&P 500 propelled upward more than 200% and international markets were up 110% at their peak this year. However the S&P 500 has retraced 6.4% since July in large part due to heavy declines in energy and material stocks. The international markets fared even worse as the MSCI EAFE dropped 10.23% and the MSCI Emerging Markets were down 17.9%. Nevertheless, according to Citigroup research, the current market correction is in line with the median annual peak to trough declines that we’ve seen in global equities since 1970. Going back even further to 1946, corrections have caused average declines of 14% but it has typically taken only 3.6 months for investors to make back their losses. So before getting depressed about short-term numbers, we must remember that corrections in bull markets are an inevitable and recurring event.

So why now? A pause in the market’s upward trend was inevitable and the headlines of the quarter provided the catalyst. We started the quarter with the Greek debt crisis and ended with Hurricane Joaquin but the most significant news items came from China’s economic forecast and the Fed’s rate hike decision. The China growth story has been the engine driving many economies around the globe, so when reports came out showing the Chinese economy was decelerating, people got concerned. The slowdown has had a dramatic effect on Asian markets and commodities. Reports of a slowing Chinese economy in turn influenced Yellen and company to once again postpone their rate hike, which left many wondering what that meant for the US and global economy. As even the Federal Reserve has had a hard time deciding if the economy is moving too fast, too slow or just right, volatility has followed. Investors reacted to these events by selling risky assets as uncertainty muddied the investing waters.

In his book, Securities Analysis, Benjamin Graham wrote that “in the short run, the market is a voting machine but in the long run, it is a weighing machine.” Fundamentals of the global economy still seem reasonably healthy, though stronger in some areas than others. When we look at a slowdown in China, we expect it will have a more direct impact on their neighboring emerging markets than developed economies and may even provide some benefits to developed nations through lower commodity prices. For this quarter, investors have voted but we believe that patience will reward investors who maintain a long term approach.


Thomas L. Menzel, CFP®                                             Shawn J. Jacobson, CFP®, ChFC, MBA
Asset Manager                                                            Asset Manager

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