How this is a market selloff with little fundamental economic impact

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Market Insights by Reese Veltenaar

 

Highlights

Volatility has increased significantly through the month of July in equities both in the U.S. and throughout the world. It has been more than 46 months** since we have seen the last 10% correction. This correction is increasing investor anxiety. Investors should not panic, but instead, review the fundamental economics of the pullback and try to evaluate risks and opportunities.

As we try to access the potential depth of the correction, we look to which factors are contributing to the current pullback. Many economists agree the primary drivers of all market corrections are psychology, economics, and/or valuations. Psychology tends to drive the immediate volatility and is also the most unpredictable component of the three factors. Our investors should try to minimize the psychological components and instead concentrate on the economics and overall valuations. These factors drive large investor actions and these two components eventually drive market movements over the long term.

Looking through the global economic outlook, the primary catalysts to this correction comes from falling commodity prices, the economic data from China, and the expectation of increased interest rates. *

 

 

When we rationalize the catalysts for this market downturn, they don’t appear to be supported by compelling economic data. There are weaknesses, but many other indicators point to a continually expanding economy. Labor is doing well, we are seeing a pickup in retail sales, auto purchases increased, we recently had an uptick in new housing sells, and as I mentioned before, we had a solid July jobs report. Growth looks acceptable.

Our firm does not believe, at this time, the market selloff will lead to larger and more significant economic problems. This type of selloff has happened frequently. In 1987, the stock market fell considerably more than this one has thus far and very little economic reaction occurred. More similar to today, the problems in Asia in 1998 did not translate to significant problems for the U.S. economy. Even the 2011 fear from Europe and a government shutdown caused a market selloff with relatively little economic impact. We believe this will likely be the same scenario.

There is always the possibility the market downturn could get worse and the news media could degrade investor confidence. For this reason, we continue to monitor the prevailing economic conditions. We have worked with clients to understand their financial goals, risk tolerance and time horizon and we believe in the power of diversified portfolios.

We will continue to look for opportunities in valuations and want our clients to resist the temptation to make knee-jerk reactions. The focus should be on quality assets, strong corporate balance sheets, and dividends. This is especially important in times of market stress. Our Acumen Wealth Advisors team is here to answer any questions you may have.

Best, Reese Veltenaar, CFP®, CTFA, M.Acc

 

*Source: Morningstar, August 2015

**Source: Bahl & Gaynor, August 2015

***Bloomberg Business, July 13, 2015

The opinions expressed in this commentary are those of the author and may not necessarily reflect those held by NFP Advisor Services, LLC. This is for general information only and is not intended to provide specific investment advice or recommendations for any individual. It is suggested that you consult your financial professional, attorney, or tax advisor with regard to your individual situation. Comments concerning the past performance are not intended to be forward looking and should not be viewed as an indication of future results. Using asset allocation or diversification as part of your investment strategy neither assures nor guarantees better performance and cannot protect against loss of principal due to changing market conditions. S&P 500 Index is an unmanaged group of securities considered to be representative of the stock market in general. You cannot directly invest in the index.

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