The Return of Market Volatility

In August 2011, the Dow Jones Industrial Average traded wildly through several days of 400+ point swings after S&P downgraded U.S. debt from its AAA rating and as the European debt crisis raged on. It has been about three years since the last 10% correction and investors have grown accustomed to low volatility, especially this past year. However, volatility has returned to the markets in October as concerns about the strength of overseas economies, particularly the Eurozone and China, rattled traders, sending the Dow down more than 300 points on Thursday. Several economic indicators out of Europe, such as declining industrial production in Germany and the IMF's downward revisions to global growth forecasts, caused the so-called "risk off" trade that sent equities tumbling. While the ECB has pledged to take additional steps through increased asset purchases as needed to stimulate economic growth, these assurances did little to calm investor concern over the European economy in the short term. The energy sector was particularly hard hit, as slow global growth combined with a stronger dollar sent oil prices to two-year lows.

While the step up in volatility is concerning and difficult to watch for investors, it is important to keep in mind a couple of central tenets to successful investing. The most important of these tenets is to never make investment decisions out of panic when the markets decline. Secondly, if an investor has a long time horizon to invest, volatility and temporary market declines should be viewed as opportunities to purchase holdings in companies that possess strong fundamentals and are poised for success over the long run. Many commentators have suggested that the markets had become somewhat over-priced this year. Now, the markets have presented better opportunities to find securities at attractive prices that will be productive for the long term. Finally, one of the chief causes of the sell-off – lower oil prices – is typically viewed as a positive sign for the economy going forward, as lower gas prices ultimately give consumers more money to spend. In short, today’s crisis can be tomorrow’s profit. While slow growth overseas will be a headwind, we still believe the U.S. economy is expanding and we have not changed our view on U.S. equities over the next 2-3 years.