Recent Equity Market Volatility
- 2 minutes
Here at FNA, you could say we are in the “what” business when it comes to market trends. In fact, I have been anticipating a pullback in the markets for the last two quarters. Unsure as to what the cause would prove to be, I was quite confident we would see it. Now that we are living it, I would like to answer a pair of questions that are likely on many of your minds.
WHY DIDN'T WE PLAY DEFENSE TO AVOID IT?
Volatility was expected, and the selloff was inevitable not because of market fundamentals, but because of market psychology and headline risk. But take heart—a quick recovery from the pullback is also fully anticipated.
Typically, the higher the market climbs, the more we hear talk of a correction. And since three years have passed since our last 10% correction in the equity markets (Summer, 2011), you could say we are due. Psychologically speaking, the market needs to check this off its list so we can move on.
Also to be expected, recent headlines are adding to the volatility. From Russia and the Ukraine, to the Middle East and Ebola: Such topics can be disturbing, and are certainly valid concerns, but do not have an immediate impact on market fundamentals.
Fundamentally, the equity markets continue to look attractive.
- 69% of companies that have already reported Q3 earnings have surpassed sales expectations
- 66% have reported better than expected earnings
- S&P 500 is trading at just over 15x forward earnings and just under 18x trailing earnings
- S&P 500 is yielding roughly 2.1%, compared to the 10 Year Treasury at 2.08%
- Weekly jobless claims fell to a 14 year low
WHAT DO WE DO NOW?
Realistically, there is no sure way to tell just how low markets will drop before bottoming out and turning around. This is especially true when trading becomes more emotional than fundamental. With that in mind, I am of the opinion that the worst is already behind us, and that now is the time to search for opportunities to take advantage of the current market situation.
While we simply can’t say the selling is over, and that soon buyers will pull up their chairs and begin feasting, the fundamentals do support a higher price point for equity markets. At this juncture, I encourage rebalancing: Let’s take advantage of lower equity valuations, and look to deploy cash that has been on the sidelines, waiting for just such an opportunity. Naturally, your trusted FNA advisors are always ready to talk, and hope to help you find peace of mind as the market recovers.
Sources: CNBC.com; Sterne Agee; Morningstar; Wall Street Journal.
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