The Roller Coaster Stock Market

During times of volatility, the stock market is often compared to a roller coaster ride. This analogy is certainly applicable to the behavior of the stock market particularly beginning mid- July of this year. On July 16, the Dow Jones Average closed at 17,138. This was the highest point for the Dow in the previous five year period.  Four weeks later on August 7^th, the Dow nose-dived to 16,368, a neighborhood that it had not seen since February of 2014. Fast forward six weeks to September 19^th where the Dow reached an all-time record of 17,279. Life was good, there was cheering on Wall Street and optimism that the quarterly 401(k) statement would contain glowing news.  Unfortunately, the Dow cooled off a little and staggered across the third quarter finish line at 17,042, giving back 236.84 from the record high. As we have moved into the fourth quarter the Dow has continued to move in a dramatic saw tooth pattern and closed at 16,117.24 on October 17^th. Unfortunately, the current view is for this type of volatility to continue through the end of the fourth quarter.

There is a market theory in the financial world referred to the “efficient market hypothesis”. One form of this hypothesis states that markets adjust rapidly to all publicly available information. In the cyber world that we live in and with the proliferation of web services that monitor financial and board room announcements,   dissemination of publicly available information seems to happen in a nano-second. Thereafter (slightly more than a nano-second), we witness how all of the major exchanges interpret this information and adjust accordingly.

I imagine that it is very perplexing for the financial gurus and analysts on Wall Street to interpret all of the crazy global events of the last quarter in the context of relatively positive economic indicators on the domestic front.    When you have this type of chaos and confusion, what I previously described is apt to happen. The forecasts and leading indicators for the fourth quarter indicate that we would be wise to tighten our seat belt and hold on tight for more of the same market volatility.

UPAL has always adhered to another tenet of investment strategy that is termed “buy and hold” that has served our clients well in volatile times such as this. The underpinnings of this philosophy are that it is never acceptable to make buy/sell decisions based on short term market fluctuations, nor is it acceptable to try and “time the market” in anticipation of market movement up or down.  Also, for persons with a moderate to long investment time horizons and low liquidity needs, it is better to maintain a portfolio with a higher ratio of equities to fixed income investments.

For the short – term outlook, one would be wise to keep a supply of Dramamine on hand.