October 21st, 2014 | Miller Advisors

Raymond James investment strategy committee address recent market volatility

Analysts at Raymond James provided a unique perspective on the current volatile market that we thought you might find helpful in understanding the sentiment in the current marketplace. 

– Kathleen Miller

Recent stock market numbers may look a little scary–down 300 points one day and then up 200 points the next. It’s been a while since we’ve seen such volatility, which can raise fear in the midst of investors–especially when the general trend appears to be down. It doesn’t help matters when the media use words such as “plunging” and “tanking.”

After a long period of unusually calm markets, volatility has returned to the market. These levels of volatility have not been since November 2011. However, this is not unexpected; members of the Investment Strategy Committee have been commenting on the possibility of a a 10%-12% pullback since July. Put into perspective, through October 16, the Dow Jones Industrial Average was down 6.7% from its September highs while the Standard & Poor’s 500 Index (S&P 500) was down 7.34%.

The increase in volatility reflects a number of concerns.

  • Geological tensions
  • Slower growth in Europe
  • Possible spread of Ebola
Downside risks to the global outlook include fear of Europe falling back into recession and the European Central Bank’s limited ability to support growth. Additionally, U.S. firms doing business in Europe may see weaker earnings, made worse by the stronger dollar. On the other hand, falling commodity prices, especially lower gasoline prices, should help support consumer spending growth in the U.S., Europe, and nearly all major economies, into 2015.
Investment Strategy Committee Perspective
The committee believes the recent pullback, which began in mid-September, remains within the framework of a long-term bull market with years left to run, driven by a numberof transformational forces, including:
  • American creativity
  • New energy development
  • Unrivaled U.S. manufacturing depth
  • Vast amounts of capital still sitting on the sidelines.
We reached out to members of the Investment Strategy Committee for their thoughts on recent market action:
Doug Drabik, Senior Strategist, Retail Fixed Income commented that with global uncertainties a flight to the U.S. as a safe haven may be in play. Investors need to stay the course. He stressed, “Continue long-term planning with the right asset class selection and a balanced portfolio. The fixed income portion of the portfolio will continue to perform with cash flow and ultimate principal return regardless of interest rate volatility or direction.
Chris Bailey, European Strategist, Raymond James Euro Equities* stated “European market volatility remains very high as the debate continues as to whether the European Central Bank will employ extra stimulus policies or not. Given the deterioration in markets and confidence levels the pressure to act despite reservations from some members states–is rising. Historical precedent based on the last couple of years suggests that a shift even closer to full blown quantitative easing is likely. The debate is focused on the precise timing of this which is feeding the uncertainty and volatility. Corporate reporting in Europe so far in this Q3 earnings season has been fairly solid assisted by the international orientation of many companies.
Scott Stolz, Senior Vice President, PCG Investment Products, noted that “Most active managers have underperformed so far this year and therefore will not be looking to take advantage of this dip in order to make up ground by the end of the calendar year.
Ryan Lewenza, Senior Vice President, Private Client Strategist and Portfolio Manager, Raymond James Ltd.,* reminded us that pullbacks and corrections are normal. “On average the S&P 500 experiences three pullbacks of five to ten percent and one correction of ten to twenty percent per year, and it’s important to focus on the long-term as annualized holding periods in the S&P 500 Index of ten years and longer have generated positive returns 90% of the time,” he shared.
Mike Gibbs, Director of Equity Portfolio & Technical Strategy agreed, “If portfolios are properly diversified to meet long-term goals, then the long-term investors should do nothing other than turn the TV off and ignore the sensationalism of the headlines.
Nick Lacy, Vice President, Asset Management Services, added “Stocks go up and stocks go down. It is normal and when volatility rises rapidly, everyone looks for the bogey man. My opinion of why we are seeing increased volatility and a big selloff is because of slower global growth. The efforts by Europe are not enough and with quantitative easing ending there is some concern about U.S. growth slowing. The question is will earnings continue to grow at a good pace and will non-U.S. companies be able to pick up momentum even though there is a massive dislocation in global growth and inflation? There are real issues. ISIS, Russia and Ebola are headlines and the financial press like to make mountains out of mole hills.
The Importance of Asset Allocation
It is during times like these that the value of asset allocation and a diversified portfolio, including an appropriate mix of equities and fixed income investments, is most apparent. While equities have pulled back, bonds have rallied with the 10-year Treasury yield at its lowest level since mid-2013. Many market participants are seemingly viewing the United States as the last safe haven given the confluence of recent events.
From September 19 to October 16, the S&P 500 declined 7.34%. In contrast, a diversified portfolio consisting of 60% S&P 500 and 40% Barclay U.S. Aggregate Bond Index declined only 3.59%.
Standard deviation is a measure of volatility. The 12-month standard deviation for the S&P 500 was 8.87%, the standard deviation for the Barclay U.S. Aggregate Bond Index was 2.58. A balanced portfolio (60%/40%) had a standard deviation of 6.35%–diversification made a significant impact, lowering overall portfolio volatility.

Source: Raymond James

*An affiliate of Raymond James & Associates and Raymond James Financial Services.Investing involves risks including the potential loss of capital. Past performance may not be an indication of future results. There is no assurance the trends mentioned will continue. Asset allocation and diversification do not guarantee a profit nor protect against loss. The Dow Jones Industrial Average is an unmanaged index of 500 widely held stocks. The Barclays U.S. Aggregate Bond Index is an unmanaged index containing approximately 8,200 fixed income issues and represents 43% of the total U.S. bond market. Investors cannot invest directly in an index. International investing involves risks such as currency fluctuations, differing financial accounting standards, and possible political and economic instability. The performance mentioned does not include fees which would reduce an investor’s performance.

This information is general in nature, and is not a complete statement for making an investing decision, and is not a recommendation or a solicitation to buy or sell any security. Investments and strategies mentioned may not be suitable for all investors. Past performance may not be indicative of future results.