If you are a market-watcher, you know the S&P 500 is down around 9% since the beginning of the year and has been down as much as 10.5%. As investors watch their accounts, the fear is always TWICE as significant as any euphoria over gain. This is the investor’s dilemma. How to fight the urge to cash in your chips and run for the hills. Read More…
One of my Advisor friends in Vancouver BC, Clay, told me how he communicates the volatility of markets to clients. He said, “I remind them, ‘I have been doing this for more than 20 years and there is one thing I know for sure. Out of any 10-year period, you will NOT like me very much TWO of those years. THREE of those years you will not care one way or the other, and in FIVE of the years you will be very glad you listened to me and followed our advice.'”
In a foreseen yet dramatic move, Greece defaulted on a $1.7 billion payment to the International Monetary Fund (IMF) Wednesday, making it the first ever developed country to default to the IMF. The Greek debt crisis began in 2010, the same year Greece accepted a bailout of billions of euros from the IMF and European Union (EU). The bailout came with strict austerity terms, including increasing taxes and reducing spending.
There are three things going on in the markets right now. First, most all of us know that long term performance smooths out short term volatility. By definition, weekly, monthly, or quarterly data will always be more volatile than the long term trend. Go back to the 1980s or 1990s, when real GDP growth was 4%, a “slow” quarter was 2%. But today, our Plow Horse economy has been expanding at about 2.5% annually instead of 4%. This means a “slow” quarter can show zero growth, or even less.
What we are seeing here is called “regression to the mean.” The S&P has underperformed its historic average over the last 15 years by nearly 50%. Eventually, we would expect it to come back into alignment. Couple that with a major downturn in the economic activity in Europe, China and Japan, and we have a global slowdown which is reflected in the stock market prices in general.