Market Correction - August 2015
No doubt that the recent stock market volatility has captured your attention over the past few days. To help clients process this information, we thought it might be helpful to offer a historical perspective to recent events. Performance of the equity markets over the past 5 years has clouded investors prospective of how volatile the stock market can be. Market corrections of more than 10% have not occurred since 2011. Market price volatility over the past 3 years is less than half of what it has been over the last three decades. Because of this, we think that taking a longer term perspective of the market might be helpful.
Since 1980, the S&P 500 has experienced an intra year decline on average of almost 15%. These declines have registered a low of -3% in 1995 and as high as -49% in 2008. The current decline as of the writing of this note is -10% (Monday August 24th). As can be seen on the chart below, market corrections are a much more usual event than what recent experience would offer. However, even considering the average 15% intra year decline, the S&P 500 has posted positive returns in 26 of those 34 calendar years (76% of the time!). We believe that market volatility offers FAI investors increased return opportunities.
Red Dots – Intra-year decline
Grey Bars – S&P 500 Return For the Year
At FAI, we have been speaking and writing for some time of how we believed that valuations were extended (our stretched rubber band analogy) and a correction was possible. We have spent the last several months preparing ourselves to take advantage of this scenario. We have solidified our asset allocation process, built multiple equity research tools and honed our internal valuation processes. We have also conducted very detailed research on a list of 30 diversified high quality companies that we felt we would like to own under the right economic conditions and valuations measures.
What I would like to assure our clients is that we will not be reacting to market price movements just because the “market is down." We have built these analysis tools to give us the confidence to make value added decisions and increase the probability of success during times when others in the market are panicking. If the market pressure continues and creates investment opportunities, we will use these analysis tools and processes to guide our investment decisions over the coming days and weeks.
Although we never claim to have a crystal ball and can’t predict with certainty how severe this correction will be, we are confident that our proprietary decision making tools will aid us in making value added decisions within the portfolio and help to increase our probabilities of success in that regard.
Thank you for the trust you have placed in us to safeguard and grow your investments.
For the Investment Committee,
Chief Investment Officer
IMPORTANT DISCLOSURE INFORMATION
Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by FAI Wealth Management), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from FAI Wealth Management. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. FAI Wealth Management is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice. A copy of FAI Wealth Management's current written disclosure statement discussing our advisory services and fees is available for review upon request.