The volatility in the markets during the past week has been exceptional. Looking back at more than a decade’s worth of data on swings in the Dow, the moves on last Monday and Tuesday rank within the top 50 most erratic or volatile days I’ve seen.
They of course don’t compare with the swings in 2008 during the height of the financial crisis, and the current situation is nothing close — this is not a financial crisis, but a crisis of confidence in our political leadership, in the state of our economic health and the broader economic health of many countries around the globe.
That said, consumer health has improved dramatically since the mortgage crisis days, corporate health is astounding given the amount of cash on balance sheets and growth in profits, and once investors focus on this, the stock market’s health will improve. This is not a replay of 2008 except in the minds of investors who, once again, are shooting first and asking questions later, if at all.
Last week’s wild market moves can largely be attributed to an emotional response to splashy headlines and are not based on current market fundamentals, which remain encouraging.
For example, one of the biggest concerns following the ratings downgrade was that interest rates would rise. This didn’t happen — in fact, it’s been the opposite, as yields on the two- and five-year Treasury dropped to all-time lows this week and the S&P 500’s dividend yield is now hovering just below the 10-year Treasury’s — a strong argument for stocks. If interest rates were higher and attractive, bonds and even cash would represent reasonable and attractive alternatives to stocks. They don’t. Not even close. In low-interest-rate environments, price-to-earnings ratios tend to be higher, and yet last Friday, P/E’s were anything but high and certainly not “higher.”
Two weeks ago, a better-than-expected employment report was a bit of a salve on the market’s wounds. More jobs were created in July than anticipated and numbers for both June and May were revised up a bit. While this still is nowhere near the robust employment we’d like this far into a recovery, it’s surely better than the alternative. Thursday morning, the Labor Department reported that unemployment applications were at a 17-week low, while the four-week average fell to its lowest level since mid-April, suggesting that layoffs had eased.
Chain store sales numbers also were good, showing that consumers are saving more and still spending. This could be further helped by the big declines in oil, which should boost consumer balance sheets and bank accounts as gasoline prices decline down the road. Cisco (NASDAQ:CSCO) reported Wednesday that sales picked up in the last quarter, beating expectations, while FedEx (NYSE:FDX) and UPS (NYSE:UPS) continue to raise their rates, which suggests strong growth for the delivery giants.
The current crisis of confidence being played out in the markets and the media is hard to stomach, but I’ve chosen to be an investor, and part and parcel of that choice is gritting my teeth and roughing out weeks like this. If I’ve done my job right, my portfolios are in line with my risk tolerance and investment goals. If my managers are doing their jobs right — and I have full faith that they are — they’re exploiting every opportunity they can to put more cash to work, positioning me to reap the benefits in the years to come.
