Following a strong run in the stock market during the second and third quarters, the fourth quarter so far has seen a market drop severe enough to have wiped out all of this year’s gains. The initial drop occurred in the first week of the quarter, and through the halfway point, the volatility has yet to subside.
If recent history serves as a guide, the market volatility is likely to continue for a while. The chart below shows the market pattern for four episodes of sudden market drops and accompanying volatility that have occurred in recent years. In each case, the time it took for the market to recover has been longer than the previous instance. For the episode that began earlier this year in February, it took seven months for the market to fully recover. If this trend continues, the market may not recover from its recent drop until the new year.
Market commentators have rationalized the recent market volatility as a result of investor anxiety over interest rates, trade wars, energy prices, Apple, Brexit, or whatever happens to be in that day’s headlines. We continue to believe that the initial drop and subsequent volatility in each of these cases was attributable to machines executing program trades based primarily on technical market indicators. These computer-driven sell orders pile on top of each other creating a downward vortex. Unfortunately, once these periods of volatility begin, it has taken a quite a while for the market to calm back down again.
Despite the recent market drop, we continue to believe that market fundamentals remain strong and that the current bull market and economic expansion should continue for at least the next year. The economy should continue to grow, stocks are not overpriced, and not much else has changed in recent weeks other than the market becoming more volatile. For our clients, their portfolios are built for a long time horizon and are tailored to support long-term goals. As long as you stick to your long-term plan, brief periods of market volatility should have little to no impact, other than the short term anxiety they create.
Thank you very much for your continued confidence in our service and advice. If you would like to discuss our opinions, outlook, or your portfolio in greater detail, we would be happy to schedule a meeting or a conference call at your convenience.
Horizon Advisors is a Houston based fee-only wealth management firm. Horizon is a fiduciary advisor. We specialize in helping successful individuals and families understand, organize, and manage their often complex financial situations. Horizon offers integrated financial planning and investment management services.