First, the bad news:
- The Dow Jones Industrial Average is down 8.8% for the quarter, and 9.8% year to date (YTD).
- The S&P 500 index is down 8.6% for the quarter and 8.4% YTD.
- Small and mid-cap stock indices haven’t fared much better, down 7.7% and 6.9% YTD respectively.
- Internationally, most all of the developed countries (like the U.S.) are down; only Japan is up YTD, about 1.4%.
- Looking at commodities, oil is down 12.7% and gold is down 4.9% YTD.
Diversification has obviously been challenging. However, as every single investment disclosure says, “Past performance is not indicative of future results.” Let’s take a look at the year to date chart for the Dow Jones Industrial Average; the market was in a tight trading range until it dropped off a cliff on August 24th. It now looks as if the year will end negatively:
Last, take a look at the year of 2004 in total; see what happened in the last three months? I recall that year, and there was a lot of doom, gloom, and angst heading into the last quarter, but it was unfounded:
Does this mean that the market will skyrocket in the next three months? Who knows, but the point is that it could. If we reflect back to the ‘bad news’, lower commodity prices will provide a strong tailwind to U.S. consumer spending. I actually bought gas for less than $2/gallon this week; for the average consumer this is a great reduction in spending from what we have been accustomed to for the last few years. In addition, employment in the U.S. continues to strengthen. As the U.S. and other developed countries show expansion signs, indications are that there is not a recession on the horizon. Also, when the Fed raises rates, likely before the end of the year, this is suggestive of a healthy economy and will be a strong signal of the Federal Reserve’s faith in our economy.
Economic turmoil has happened before, it is happening now, and it will happen again down the road. As always, portfolio diversification is key to a successful long term investment strategy.