Market Volatility "Made In China"

September 2, 2015 in Investments, Participant Education

Participant Communications during Volatile Market Periods are Critical.

We all get anxious when the stock market makes the news for the wrong reasons. The recent market volatility has everyone concerned that a bear market is on the horizon. Participants start reacting emotionally and move out of the market at the worst time possible. That would explain why the average plan participant returned 2.7% over the last twenty years while a participant who maintained a 60/40 mix of stocks and bonds (without making changes to their investment allocation) returned 8.7%. Selling into a correction is the wrong decision.

What happened?

The first correction in three years is upon us. The market fell 12% from its peak as of August 26th. The main issues are the fear of a global slow down lead by China and uncertainty about the timing and pace of the Federal Reserve raising interest rates.

The good news is that we have seen similar pull-backs during this bull market but resiliency has been strong based on healthy domestic economic fundamentals. Even in "normal" times, pull-backs are not unusual. We have seen 10%+ corrections in 19 of the last 35 years and 5% pull-backs in all but two years. Despite these draw downs, the S&P 500 has achieved a positive calendar year return in almost 80% of all calendar years since 1980!

What next?

Despite the correction, current signs do not indicate a bear market. The slow-but-stable United States economic expansion remains intact based on a range of positive economic indicators. This has happened despite headwinds from Europe, China and the plunge in commodity prices over the past year. Most bear markets do not "happen" they are "caused". They are the result of an economic recession. Other historical causes include commodity spikes, aggressive Fed tightening and extreme valuations....none of which are present today. Valuations are near average levels presently.

What should we communicate to participants? REMAIN CALM. Do not act emotionally and stay diversified. Now is not the time to time the market or panic. The best offense is a good defense. For long-term investors, diversification rebalancing and a healthy time horizon have proven to help weather storms like these.

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