Corrections are a normal and necessary part of a cycle Investors understand, and profess to embrace, the concept that risk and reward are linked. A common measure of risk in the equities markets is volatility and that is what we are seeing presently in the global equity markets. It is helpful to look at the magnitude of the current market movements in more than a one or two day context. The correction in the S&P 500 as of the August 21 close has been just about about 7.5%, nothing extraordinary when compared to the other pull-backs since 2009. Even if the S&P 500 were to fall to 1850, and we see a correction of 13%, this would not lie outside of the boundaries of expected volatility. The chart below shows both the timing and magnitude of market corrections since the beginning of the current bull market in 2009.

Plan your work then work your plan
An investment policy or plan is essential for long term success. We believe a well diversified approach to the global equities markets remains a proven plan, or strategy, to ride out these periodic dislocations. Rebalancing an asset allocation, if the resulting mix is out of tolerance, can also add to the long term return of your strategy. For those whose risk or time constraints do not allow for this type of volatility, the inclusion of other asset classes such as bonds, cash and alternatives should be a part of their strategy. While the S&P and other equity indexes have been in correction mode recently, the bond markets are providing one type of risk management for investors. Bonds are reacting to continued Fed watching, other central banks’ stimulus plans, the overall health of economies around the world and other factors in different ways than are equities. Some asset classes within fixed income have been performing quite well. While the S&P 500 is down over 6% MTD through 8/21, the Barclays US Aggregate Bond Index is up over 0.5%.

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