Fall 2014's Market Correction

Posted 03 Nov 2014 by Rick Irwin, CFP, CLU

After a few years of relatively low volatility and steady growth, financial markets have recently become somewhat more unsettled. In September and October stock markets went through a typical mid-cycle “correction” which is a healthy and normal process that typically occurs about once a year on average. Corrections by definition are drops of 10% or more to the broad-based market and in this case we saw declines of eight to 12% globally so it fits into the regular pattern (despite all of the “sky is falling” TV chatter.) This one was unique for only two things.

#1: That it was so long overdue. It has been approximately three years since the U.S. market went through a meaningful correction. Such a long period of stability is, in fact, highly unusual for stock markets, and we should not be surprised by higher levels of volatility. In fact, this correction was widely anticipated and is viewed as a positive development. This “re-pricing” process helps markets re-assess risk and provides the foundation for the next leg-up in a healthy market cycle.

#2: The speed of the decline surprised a lot of people and provided ample fodder for the news media to start up the fear factory. The specific trigger may have been unrest in Asia, Ebola, renewed terrorist fears etc. but the larger issue was concern on the slowing pace of economic growth, in China, Japan and Europe, and the winding down of the U.S. Federal Reserve’s economic stimulus plan.

While no one can predict how prices will move in the short term, there are a number of circumstances that remain supportive of markets, including low interest rates, strong corporate earnings, and a strengthening North American economy. For example, the U.S. economy grew at an impressive annual rate of 4.6% in the second quarter, and the unemployment rate fell below 6% in September for the first time since July 2008. There are always reasons for concern but the global economy is operating at fairly modest levels and recessions (the primary cause of more meaningful market downturns) rarely ever happen until the economy is firing on all cylinders; including a very tight job market, high inflation and other factors that simply aren’t present now.

One way to weather market volatility could be to take a longer-term view and remain invested in a diversified portfolio tailored to your individual objectives. Diversification by asset class, industry sector, and geographic region could help provide more stable returns, because not all investments respond to events in the same way. As mutual fund investors we now have access to more “tools in the toolkit” to mitigate risk than we did in the past and, following the lead of the nation’s largest pension plans, we have been working to incorporate some of these strategies into your investments.