October 8, 2014 | by Scott Miller, Jr.
In our January newsletter, we wrote about the numerous market prognosticators predicting an “Imminent 10% decline in the US equity markets.” Another quarter has passed without the equity markets suffering through this expected correction. A pullback of 10% or greater will certainly come. However, as we have said many times, “Trying to time the stock market is a loser’s game over the long term.” Market timers need to be correct at least twice: First, when to sell out of the market and then when to buy back in. This is an unlikely proposition for even the savviest investor.
September certainly was a volatile month. In fact, September was only the third month to experience a decline in the S&P 500 Index this year. Overall, the S&P 500 was able to eke out a miniscule gain of less than 1% for the 3rd quarter. There are still several events that warrant our attention including the rather weak European data (will they see quantitative easing?), the Hong Kong protests (is this just another occupy Wall Street movement?), the Ebola virus coming to the US (remember all of the concern about SARS?) and continued poor US economic data. Will third quarter growth slow after volatile Q1 and Q2 readings? In addition, the dollar continues to be remarkably strong. Will this slow the growth of our companies selling products to overseas markets in the 4th quarter?
Is the market fairly valued at current levels? This may depend on the index you are using as a proxy for the US market. The Dow Jones is up 2.81% year-to-date. The S&P 500 is up 6.70% year- to-date. The Russell 2000 (the small cap index) is actually down 5.32% with the index falling 6.19% in September alone. Some experts believe that the Russell 2000 is the most important index to follow to gauge the health of the domestic economy because small companies tend to react more quickly to favorable as well as unfavorable trends. It is possible that the Russell 2000 will lead the rest of the market down. Certainly, the September market movement must be watched as IWM (ETF based on the Russell 2000) was down 5.93% while SPY (S&P 500) was down 1.38%.
We continue to monitor market movements and believe that any correction in the overall market will be just that, a correction and not the start of a new bear market. Using techniques to help lower portfolio volatility is a goal for many of our clients.
As always we appreciate the confidence you place in us and always welcome your questions and visits to our office. Please let us know any of your concerns or any changes in your financial or position.