Addressing the Recent Volatility in the Market

As I’m sure you are aware, the stock market has experienced significant losses recently. The market is down a little over 16% from its highs of six months ago. There are three primary reasons for the decline:

  • First and foremost, the meltdown in the markets in China 
  • Second, the continued decline in oil prices 
  • And third, to a lesser extent, the potential rise in interest rates

With these concerns as a backdrop, the main question to be answered is whether this is the beginning of a devastating drop in the market or simply a temporary correction.

It may surprise you to know that a 10% correction in the market happens on average about once every 12 months. The last time we suffered a decline of 10% or more was back in 2011. So to say that we were due for a correction of this magnitude is an understatement. Volatility over the last four years has been extremely low and has lulled us into a sense of complacency. The right kind of a correction in the market provides opportunity for those who are patient and don’t panic. The obvious question is whether this is the “right kind” of a correction.

To answer that question we need to explore the fundamentals of the U.S. economy. Based on the following economic reports, most indicators point to a strong economy and one that is positioned for positive results:

  • NAHB U.S. Housing Index rose in July and has now been positive for 14 consecutive months 
  • July Housing Starts were positive, rising 0.2% 
  • July Existing Home Sales were up 2.0% 
  • Q2 E-Commerce Sales were up 4.2% 
  • Q2 Total Retail Sales were up 1.6%  
  • July CPI rose 0.1% and is up 0.2% from a year ago 
  • July Core CPI (excluding food & energy) rose 0.1% and is up 1.8% year to year 
  • Last week’s Jobless Claims were up slightly by 4,000 from previous week 
  • U.S. Dollar peaked back in March and now appears to be heading lower 
  • Lower commodity prices will benefit the US consumer, although Oil decline may not be over  

Taking all of this into account, what should be the course of action? Despite our expectation of continued volatility through the remainder of the year, our strong recommendation is to avoid the urge to panic. Ride out the storm, and look for possible investment opportunities as they present themselves. It is for times just like these that we diversify our clients’ investments and recommend real estate as a core part of the portfolio. We do not feel that real estate will be negatively impacted by the current situation. This is much different from the real estate meltdown in 2008. That crisis was largely caused by very loose lending practices in place at the time. The pendulum has swung the other way since then and the real estate market is now quite healthy in many areas, especially if you are properly leveraged. We are hoping that this correction, and others in the future that shall surely come, will cause a little panic in the real estate world and present some good opportunities for us.

We will continue to closely monitor the situation and keep you informed. Please give us a call if you have any concerns or questions.

Your Cornerstone Team