The U.S. stock markets, as represented by the S&P 500 index, have fallen by 7.5% through last Friday from their May, 2015 highs, and are falling further today. As shown on the following chart, declines of this magnitude occur frequently (even if our memories of them are easily repressed) and are part of the normal and healthy functioning of our markets. On the chart, the vertical blue bars represent the gains and losses for each calendar year; the red points represent the largest decline that occurred during the year from peak to trough. Of course, anytime we are in the middle of a stock market correction it is easy to get caught in the moment and lose perspective that this happens often.
Ultimately, asset prices are linked to their intrinsic, economic values. This is true with stocks, bonds, real estate, most commodities and virtually anything else you can price. Very simply put, strong assets that reliably produce consistent and/or growing cash flow are worth more; weak assets that generate little cash flow are worth less. As investors in stocks and bonds, we carefully evaluate the assets we own, understand their intrinsic values and only acquire them when they can be purchased at reasonable (or whenever possible, bargain) prices. We are confident that the factors that are identified as the cause of the market volatility, including the Chinese currency devaluation, weakness in the Chinese economy and a drop in commodities prices, will not have a material adverse effect on the long-term profitability of the businesses or the strength of the bonds that are held in your portfolio. Therefore, the intrinsic values of your holdings are unimpaired. Knowing this allows us to ride with greater confidence through market volatility.
At times of market volatility like these, we all need to remind ourselves of our investment discipline and commit to it, and remind ourselves of the harm that comes from emotionally charged investment decisions. We will of course be vigilant to other events that might have an adverse impact on our holdings’ intrinsic value and will act accordingly. We will also watch for opportunities that volatility presents to acquire great assets on the cheap.
Meanwhile, please don’t hesitate to contact your financial advisor with any comments and questions.