Market Declines and Opportunity

On July 31, stocks suffered one of their worst single day losses of the year. All three major indexes fell, led by the NASDAQ:

  • Dow: 16,563.30, -317.1, (-1.9%)
  • S&P 500: 1,930.67, -39.4, (-2%)
  • NASDAQ: 4,369.77, -93.2, (-2.1%)

The weak performance meant that stocks declined overall in July, the first monthly decline since January. The market suffered further on Friday, so August is not off to a strong start.

The declines came on the heels of stronger-than-expected year-over-year second quarter GDP (Gross Domestic Product) growth of 4.0%. In addition, the first-quarter decline in GDP was reduced from 2.9% to 2.1%. Several factors likely contributed to Thursday’s weakness. One particular data point highlighted by stock market traders was Thursday’s news that the employment cost index (ECI) jumped 0.7% in the second quarter. The figure was a bit higher than the 0.5% expected by economists. It also represented a year-over-year growth rate in excess of 2%.

The increase in the ECI is important as it is indicative of both inflation and labor-market tightness. These two forces could pressure the Federal Reserve to tighten monetary policy sooner rather than later.

Other potential causes for the market’s decline include Argentina’s default on its sovereign debt, as well as continued concerns about the geopolitical situations in both the Middle East and Russia.

While it is never pleasant to see one’s portfolio decline, it is important to remain focused on the long- rather than short-term. It has been more than 1,000 days since the market’s last correction (a decline of 10%-20%). While a correction is not necessarily imminent, we should not be surprised when the next correction (or dare we say it, bear market) occurs. At the same time, while we may be overdue for a market correction, that need not mark the end of the bull cycle. The market and the economy both have cycles. Over time, investors will, unfortunately, experience both.

BWFA Investment Approach

We maintain our positive long-term stock market outlook. As we have said in the past, broad stock market declines can provide the opportunity to initiate or increase holdings of high-quality companies trading at cheaper prices. For example, when the stock market fell sharply in 2008, the stock of virtually all financial firms fell well more than the market. However, some financial firms were better positioned than others. Stocks of companies such as American Express (AXP) which did not participate directly in the mortgage market tumbled about as precipitously as those of peers that did participate. AXP shares are currently trading more than six times above their 2009 lows.

In addition, our broadly diversified investment approach should help protect investors from abnormally large declines. Our value-based investment process and philosophy should also help to minimize risk. We will continue to look for opportunities to put client money to work in ways that will lead to long-term asset growth.