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Napa Valley Wealth Management - St. Helena, CA

Our Thoughts on Recent Stock Market Volatility

| September 02, 2015
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Though global markets fell in recent weeks, we believe it does not signal a stock market turn. As in 2Q 2010 and 3Q 2011, this is one of few market corrections (defined as more than a 10% decline) since the recovery and current bull run started in March 2009.

S&P 500 Stock Market Corrections Since 2009

In fact, the quarters following the two previous corrections boasted roughly 10% returns (see table below).

Average S&P 500 Returns After Market Corrections

We believe the current dip is a normal market correction, which typically happens once every 2.5 years. This correction was spurred by reactions to China slowing down and a correction to their stock market, which had been in a bubble. 

As we wrote in our latest Quarterly Economic and Market Forecasts (published August 17, 2015), we’ve expected increased volatility. We also expect U.S. and foreign stock markets to continue to grow, for several reasons: 

  1. Market Valuations: The U.S. stock market has entered its seventh year of increase and the S&P 500 has gained a full 211% since the March 2009 low. While S&P valuations are currently higher than 25-year averages, the market is only slightly expensive relative to history—not highly overvalued—and it is still cheaper than bonds. 

  2. Underlying Corporate Earnings: A continued U.S. economic recovery and large cash balances on corporate books are both fuel for continued earnings—and earnings bode well for stock prices. 

  3. The Average Investor: Individual investors as a whole have not begun pouring money into stocks, which they historically do near the top of a curve. Roughly $2.3 trillion in cash remains in investment accounts—an incredibly large amount. With any increased activity from the average investor, we’ll see funds flow into equities, which should spur equity prices. 

  4. Historical Bear Market Triggers: Conditions that have existed to prompt previous bear runs (recession, commodity spikes, aggressive Fed tightening, and extreme market valuations) are not present at this point. There is little to suppose an imminent bear market. 

  5. Strong Support for Foreign Stocks: Foreign equities have underperformed since 2011 and are currently 20% below their 20-year averages. European stocks might provide some of the best returns over the next few years: With the EU debt crisis primarily behind us, the European stimulus and weaker euro are driving true supply, demand, and earnings expectations. The stimulus is now a powerful driver and should far outweigh currency issues.

Expecting volatility, we have been adding investments that typically do not move in the same direction as stocks when markets swing. 

In fact, our portfolios are built for market ups and downs. Using asset allocation strategies, we construct our portfolios with a diversified mix of asset classes that respond differently during market changes. This diversification method helps you work toward long term returns while managing your risk. 

As part of our ongoing asset management process, we are constantly reviewing our clients' individual portfolios and evaluating the changes needed to preserve their principal and pursue their long-term goals.

We welcome your calls to discuss our current positions and the effects of market volatility on your portfolio. Our mission is to help you achieve your long-term goals with the least possible risk.

To Your Fiscal Health, 

Napa Walnut Creek Investment Managers

Investment Planning Committee Members

Bob Lance, Director of Operations
Kelly Crane, Chief Investment Officer
Earl Knecht, Portfolio Manager

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. The economic forecasts set forth in the presentation may not develop as predicted and there can be no guarantee that strategies promoted will be successful. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.

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