As 2015 has been one of the least volatile years in recent history, we have been anticipating a market correction for some time. In fact, volatility has been near the record low since the VIX (a benchmark measuring volatility) was created in the early 1980’s. Because we’ve averaged one 10% decline annually since 1900, we are actually long overdue for this correction. As the chart below shows, even with intra-year stock market declines every year in history, the broad investment market often ends the year positive.
What is actually happening?
We’re in the seventh year of a recovery, which started in March of 2009. From the lows in March 2009 through July 31, 2015, the S&P 500 (with dividends reinvested) was up 201% cumulative and 19.0% annualized. A market pull-back was inevitable and investors should stay the course.
China is slowing down but there are other bright spots in the world economy such as the U.S. and Europe and the bond market. Interest rates and inflation are low which makes corporate investing appealing.
The Up Side
An intra-year decline gives good opportunity to invest cash that’s currently “on the side”. Periodically rebalancing allows one to capture gains and reinvest in lower value assets forcing one to buy low and sell high. While the market may be fully valued now, it is not extremely overvalued.
The Take Away
Our perspective is that it’s important to invest for the long-term, and to remain diversified. Market-timers have to be right twice – knowing when to sell and when to buy back – which is very difficult to predict.