Despite a choppy return pattern over the past several weeks, U.S. stocks finished the first half of 2013 strongly positive, overcoming fears like the fiscal cliff, government spending sequester, downward revision of gross domestic product (economic output) and still stubborn unemployment.
The Dow Jones Industrial Average* gained 13.8% for its strongest first six months of the year since 1999.
The downward volatility introduced to the stock market in June caused the first pullback of 5% or more since November 2012. According to Birinyi Associates, it was the 17th retreat of 5% or more for U.S. stocks since the bull market began March 9, 2009. The median of the previous 16 declines was 7.7% and they took a median 20 days to come back. The pullback, at this point, was limited to -5.76% peak-to-trough and the market has recaptured most of that dip.
It's not stock market volatility, but bond market changes that have created the tougher investment climate over the past couple months. Bonds have had a very hard time adjusting to the shifting interest rate landscape and talk of the Federal Reserve tapering its economic stimulus programs.
While the recent spike in volatility has been jarring, it comes after relatively long periods of calm for both stocks and bonds. Recent doubling of volatility measures represents a return to long-term average volatility rather than anything indicating crisis.
According to Blackrock Chief Investment Strategist Russ Koesterich, "Every asset class, from stocks to gold, has experienced a pronounced spike in volatility as investors digest the possible impact of the Fed tapering its bond buying program. And though tapering isn't likely to derail the recovery, I expect that volatility is likely to continue in coming months as investors accustomed to ever looser monetary conditions adapt to tighter money."
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Click on the image to open a larger PDF version. Source: Crandall, Pierce & Co
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Adapt is the key word here. Market conditions are constantly in a state of adaptation. The chart to the right demonstrates bull markets, bear markets and corrections over the past 65 years of U.S. stocks. The bulls have historically adapted and overcome the bears. With this in mind, we are generally long-term buy-and-hold investors at the core of our investment recommendations. When rebalancing is prudent, risk management heightened or where opportunity presents itself, we adapt our recommendations more often at the margins of portfolios.
If you have thoughts you would like to discuss about your investments, or any of the ideas in this month's newsletter, please give us a call.
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