24 Aug 2015 Beacon Flash
Since its peak on May 21st, the S&P has fallen by nearly 10%. Stocks were pretty well behaved in the weeks that followed Fed Chair Janet Yellen’s May speech in which she warned that interest rates would likely begin rising this year. But China’s equity slide last Monday became the catalyst for a more significant US equity slide of 5% for the week ended last Friday. As of this writing, stock averages are down another 3%.
We understand that rapid market drops are unsettling, particularly as they become the focus of media and dominate our conversations. We want to encourage you to keep the big picture in mind. Well-allocated portfolios like ours are built with assets that most often bounce when stocks are retreating. As we continually harp, we believe US Treasurys (7-10 year) benefit from the ‘flight to quality’ better than any other asset class. This time is no different. After falling 2.75% on Yellen’s comments that this is the year for Fed rate increases, the 7-10 Year index has risen 4.4% on fears that China’s slump might have a more significant impact on the US and European economies.
The rise in Treasurys means that your portfolios are not down as much as the stock indexes suggest. As of Friday’s close the S&P was down 9.21% from its May 21st peak. Our average Balanced portfolio, which contains a 60% allocation of stocks, was down 4.4%.
Today Bloomberg News features an analysis by Bespoke Investment Group which demonstrates what has happened to stocks in the weeks following a 5% weekly drop. There have been 28 such drops since 1980. Julie Verhagel, author of the article points out “On average, the market is relatively flat the next week, up 1.65% over the next four weeks, and up close to 5% over the next 12 weeks. Also important to note is that 60% of the time, the index moves higher the following week.”
The most important point we want to leave you with is that we are here should you have any questions or concerns. We are watching your plans as asset prices change and will let you know if any adjustments are required. Recent declines are nowhere near deep enough to render plans under-funded, but should it become necessary, we will contact you with remedies in line with your priorities to get you back on track.