The stock market is off to a rough start this year, with the S&P 500 stock index down about 10% in January as of mid-day today.  Many commentators have taken to the air with predictions of doom and gloom, and comparisons are being made to the last big “bear market” of 2008.  While market volatility is to be expected from time to time, the speed with which markets have dropped has been particularly unsettling.

There are certainly issues for investors to worry about, including the continued drop in oil prices, terrorism, the slowing of economic growth in China, and the potential for further interest rate increases by the Federal Reserve.  However, we think that these would not have a large enough effect on the U.S. economy to derail its continuing growth, and along with it the growth of corporate earnings. 

There are no overt indications that our economy remains anything but fundamentally sound.  Unemployment is now only about 5% and economic growth has been steady, if slow.  Therefore, we view the current drop as a sharp but likely short correction within the ongoing bull market, rather than a larger and longer bear market of the kind associated with economic recessions.

The current turmoil in the stock market is reminiscent of previous episodes of “waterfall declines” not connected to economic downturns, such as those that occurred in 1962, 1966, 1987, and 2010.  The speed with which market movements are taking place is partly a function of the speed with which information is disseminated and the concentration of sizable amounts of capital in hedge funds dedicated to short-term trading tactics.

As investment counselors, we take a longer-term view.  While the current correction may have further to go, such an event can provide investment opportunities.  We continually evaluate, and where appropriate, make portfolio adjustments to benefit our clients.

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