It seems that the market doesn’t remember one day from another. On Wednesday of last week, the market had a very strong day, only to sell off sharply on Thursday. Most analysts could not understand what the difference was between Wednesday and Thursday as there was not any negative news reported.
It seems like the leaders of last year, are now the laggards. A number of momentum and growth stocks took the brunt of the late week selloff. It is the inverse of the market action we knew in 2013.
Market Volatility increasing
The volatility has increased since April Fool’s day. The VIX (CBOE Market Volatility) has increased 23%. One could guess that the move up in volatility has increased the market’s ‘mood’, from one day to next.
Market Performance Last Week
Markets closed a volatile week on a bearish note as the first earnings reports trickled in. For the week, the S&P 500 lost 2.65%, the Dow fell 2.35%, and the Nasdaq dropped 3.10%.1 One bright spot was that despite the dismal stock performance, economic fundamentals are looking up. What lessons should we take away from last week? We’ll get to that in a moment. First, let’s review the factors that contributed to last week’s performance:
- Most of last week’s market decline came as a result of investors positioning themselves for a challenging earnings season. Many analysts had predicted a market reversal in 2014 as investors paused to take the pulse of last year’s big winners, and that is precisely what we’re seeing. Most of the sectors that have been hit hard this year were high fliers in 2013.2
- On the economic front, consumer sentiment reached it’s highest level since last July as improvements in the labor market boosted optimism about the economy.3 However, since sentiment tends to mirror equity performance, if markets don’t improve, we may see that optimism wane in coming weeks. The week’s unemployment report was also very positive as new unemployment claims fell to the lowest level since May 2007.4
The crisis in Ukraine continued to simmer last week as the Ukrainian army sought to eject pro-Russian separatists from a complex near the eastern border.5 Tensions increased as Russia raised the price of natural gas exports to Ukraine by 80% and Ukraine retaliated by halting payments, pushing the two sides closer to another “gas war.”6 If Russia makes good on it’s threat to shut off the gas pipeline through Ukraine, EU states that depend on supplies from Ukraine could be affected.
Don’t Buy the Hype
Recent market troubles offer a teachable moment for investors: Don’t buy the hype. Let your long-term personal and financial goals drive your investment strategy and choose solid investments that suit your needs. Market volatility will always challenge investors, but we believe that a prudent investment strategy and active risk management can ultimately lead to better long-term outcomes.
Another important lesson is the need to tune out emotion and stick to a disciplined investment plan. Plenty of investors are looking glumly at their portfolio values, not realizing that a) recent losses may provide opportunities to cherry-pick solid stocks at attractive prices, and b) that economic fundamentals point to a rosier second quarter, giving us hope that equities will rally soon. The real losers will be those who gave in to greed and bought high-performers on the upswing, and who panicked and sold near the bottom.
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