Thoughts on Recent Market Volatility


As you know, August has brought significant volatility to the stock market with both the S&P 500 and the Dow Jones Industrial Average dropping 5.8% last week and another 4% on Monday. The selloff came amidst continued declines in oil prices, economic turmoil in China, and uncertainty from the Federal Reserve as the minutes from their most recent meeting sent mixed signals about the timing of their much-anticipated interest rate hike. While the speed of the stock market decline has been unquestionably abrupt and difficult to stomach, we believe there are still many reasons to feel cautiously optimistic.

First, stock market volatility has been overdue for some time. Recall that the S&P 500 has delivered an average annualized return of 14% over the past three years and that we have not experienced a meaningful price drop since 2011, which is highly unusual by historical standards. Holding high-quality companies with sound balance sheets will help you ride out periods of short-term volatility.

Second, U.S. economic fundamentals remain solid and supportive. Extended stock market declines have historically been kicked off by an economic downturn, which we do not foresee. On the contrary, the U.S. economy is growing at an annualized pace of 3% and the labor market appears firm, with all indications showing that we appear to still be solidly in the midst of an economic expansion.

Third, although the signs of a slowdown in China are troubling and bear continued scrutiny, the direct impact on the U.S. should be limited. Only 2% of S&P 500 company revenue comes from China, and a recent analysis by economists at Goldman Sachs estimates that a 1% decline in China GDP growth would result in a modest 0.06% decline in U.S. growth.

Finally, remember that your stock investments are intended to be held for a period of at least 3-5 years and can withstand short-term volatility. While market selloffs are painful to ride out in the short run, try to keep in mind that investment plans are established with considerations to your near-term cash flow needs, and it is important to let your growth assets stay in the market to ride back upwards when the recent trend reverses as we know it eventually will.