As this is being written, the market has begun to turn lower / trade in a range and some indexes have even turned negative for the year. Many investors haven’t realized this yet but the data shows a growing number of segments which are becoming weaker. In many instances this isn’t too surprising since there is ample history which shows that since 1950 the June through September time period for the S&P 500 Index has a greater likelihood of a negative return (36% of the time) versus that comprising October through May (23% of the time).1
If you are looking for the primary reason as to what may cause the market to decline, you should concentrate on the geopolitical events which are occurring daily. We are witnessing increasing strife in Iraq and Israel while tensions in the Ukraine have yet to subside. Recent air strikes and cease fires haven’t caused all sides to reduce their intention of further hostility.
All of these events have created a situation where global economic growth may stall or, as already witnessed in certain regions, contract. Any continuation could in turn put pressure on US data which in turn would lead to similar results. Should this begin to take hold amongst the stronger economies, a more meaningful market downturn could occur. Yet, if it starts to subside without any additional flare ups, the economy could grow even faster and the market could again resume its upward bias.
Does this mean the recent actions warrant you to bail out of the market? The answer is a “NO”!! Instead you should follow your plan of attack. If you are a Buy-and-Hold investor, conventional wisdom says that there is no need to make any adjustments unless you are approaching your annual review and rotation date. If this event is approaching, look at your holdings to decide what should be liquidated, reduced or added to for the next year.
If you are a risk adverse investor, review your downside limits to make sure that you are comfortable with where they have been set. In most circumstances, it may be best to avoid making any adjustments to the downside limits and let the market make decisions for you. If you are interested in adding to positions on weakness, focus on building your “shopping list” should prices decline to a point where you would feel comfortable to add to or build a new position. This is a good way of developing patience during uncertain times.
Tom is the Founder of TRG and has been the President and Chief Investment Officer since 2008.