Markets dropped more than 5% in the most turbulent week in 2 years. What made last week unique was that both stocks and bonds fell simultaneously. More often than not when stocks fall bonds go up as a place for investors to hide from volatility. The stock market has been dependant on low interest rates for 9 years and with the prospects of increasing rates pressure is mounting on both asset classes. The question for investors is where they can put their money for a reasonable return in light of these conditions?
It's important to note that the speed in which the volatility occurred was a result from highly leveraged financial products abundant in the financial markets. People betting against low volatility we're suddenly hit with a big bill and were scrambling to cover their losses by selling additional assets. This significantly amplified last week’s volatility and we can expect more of the same in the future. The lesson here is not to own leveraged assets or exchange traded notes (ETNs) as their existence is currently being tested.
Despite all we saw last week and the media's latest announcement that we're now in a correction, technically we’re still in a bull market. The S&P 500 continues to hover above its support line at 2,600. A break below this could result in a longer-term, sustained correction. It’s just too soon to tell.
Stocks remain the best option for a long-term return despite its obvious risks. Interest rates remain low enough to support continued stimulus for the stock market and the risk of only holding bonds is too severe. Investors know not to go to cash as rates are so low that they wouldn’t survive inflation.
At Eureka Wealth Management, I provide a technical and fundamental to approach to investing. More importantly, I help my clients stay on course to reach their goals, even during times of volatility. Call me for a free portfolio review at (760) 537-0791 or online at eurekawealthmanagement.com.