Gyrations and Gains

After months of predictions that the time was ripe for a sell-off, the naysayers finally saw their forecasts come true when a series of dramatic sell-offs pushed the Standard & Poor’s 500 index down dramatically – almost 7.5 percent below the record it hit in September. After about a week of decline in the first half of October, during which time pundits here and overseas bemoaned the state of the global economy as the major factor in the slump, U.S. stocks rebounded dramatically with the S&P 500 recording its best gain in almost 2 years.

What does the recent see-saw tell us?

Perhaps the most obvious answer is that the market has always had these types of sell-offs – they are a fundamental factor in stock market history. Historically, the recent bull run was overdue for some sort of correction. Stocks cannot be on a constantly upward trajectory, and investors may have forgotten that flip-flops like this one are a necessary rebalancing, providing us with an opportunity to reassess the market and identify stocks that have the potential to soar in the future. It has been about three years since the last market correction – the recent slide did not make the 10 percent drop that would qualify it technically as a correction – and investors enjoying the market’s steady momentum may have grown complacent. The recent plunge gives individual investors the opportunity to re-examine the fundamental drivers of the market – economic health, job creation and company earnings – and to rebalance their portfolios and diversify to hedge against possible declines in the future. Some regard this as a positive, but other analysts anticipate more caution in the markets going forward. They believe the October flip-flop has reminded investors that stocks are priced high and that the global economy is far from healthy.

Some see the specter of rising interest rates as a major culprit in the recent plunge. They suspect that the timing of the slump suggests that investors were anticipating the end of the Federal Reserve’s bond-buying program in October. Interest rates are expected to begin increasing in mid-2015. Some note that the sell-off only began to halt when the St. Louis-based Federal Reserve president suggested the Fed reconsider concluding the program.

Does the rebound mean we are out of the woods?

Maybe. Some analysts think the recent slump was more typical of a bull market trajectory than a bear market. They don’t believe that the sell-off was a precursor of an even steeper drop in the near future. They also think that the U.S. markets will continue to attract foreign investors because economic growth here is healthier than in other major markets. However, some sounded a note of caution, reminding us that changes in monetary policy almost always spur volatility. When the Fed acts, it is likely we will see more gyrations.

As always, the above commentary is general in nature and is not intended to replace the advice of professional investment and tax advisors.

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