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Market volatility: what to do?

By Sheyna Steiner · Bankrate.com
Friday, August 5, 2011
Posted: 12 pm ET

On Thursday, the Dow Jones Industrial Average lost about 4.3 percent, down 513 points at the day's close.

The Standard & Poor's 500 index also fell on Thursday, tumbling 4.78 percent. That wasn't the end, global markets followed suit with Asian stock markets joining the fray and European markets opening to tumult on Friday.

This follows a week of slumping markets and disconcerting economic news, notably news last Friday that the American economy grew at a sluggish annual rate of 1.3 percent in the second quarter.

To explain the suddenly accelerated selloff, many analysts have pointed to the huge debt burdens in the U.S. and Europe and the fumbling attempts of policymakers to address the situation. PIMCO CEO Mohamed El-Erian wrote a guest blog on the CNBC Web site titled "El-Erian: Making sense of Thursday's Violent Market Selloff."

Markets are worried that policymakers will not be able to put the economy back on the path of high growth and proper job creation.

Already there were worries about Washington running out of bullets when it comes to effective policy measures. These worries have been hugely amplified in the last two weeks by the stunning political dysfunctionality exposed by the debt ceiling debacle.

And then there is Europe, the third factor. By failing to act decisively, policymakers have allowed the Euro-zone's crisis to morph from the outer periphery (Greece, Ireland and Portugal) to also include much larger (and, therefore, harder to solve) countries (Italy and Spain), as well as the continent's banking system.

With global markets in turmoil, a soft American economy and a hamstrung government -- what should most investors be doing right now?

"While you can't dismiss every indicator, we don't see an imminent need for portfolio changes especially with strong corporate profits and positive yearend guidance still coming out," says Robert Laura, president of Synergos Financial Group in Howell, Mich.

"This isn't the first or last sell-off we'll experience, in fact last year at almost this exact same time we suffered a similar market down turn with some of the same headlines pushing us down.  Fortunately, the market turned and provided some nice gains before the year-end.  We still expect much of the same for this year," he says.

Stay the course, in other words. Possibly turn off the news as well.

But, investors should always invest in line with their risk tolerance.

Investors who are largely uncomfortable with market volatility may want to re-evaluate their asset allocation, says Frank Germack, director of the investment department at Rehmann Financial, a division of Rehmann, one of the largest CPA, business consulting and wealth management firms in Michigan.

"Fixed income yields are very low but as in 2008 and 2009, Treasuries remain a safe haven asset. Yields don't tend to matter too much when they are selling other asset classes," Germack says.

"Equity markets, again with strong corporate profits, specifically large caps look attractive but technical patterns driven by strong selling can bring lower stock prices in the coming weeks and months," he says.

While the economy may be slowing, it is still expanding and corporate profits are strong. Yesterday's selloff may be extended by further technical declines, as opposed to selling based on fundamental unsoundness in company's financials.

"Negative trends can lead to more selling. There could be some other reasons, margin calls, or certain key levels that are breached which force more selling. There are two broad themes: fundamental, based on earnings and growth; and technical, which is more short-term in nature and is driven by fear or confidence. It could be a certain floor breached or a certain number of days of selling. Sudden drops like what can occur yesterday can be self-fulfilling," says Germack.

When the markets get rocky is when you find out just how well you've gauged your risk tolerance. How do you feel about you asset allocation?

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2 Comments
rahul
August 08, 2011 at 4:49 am

nice information, thanks for for sharing ...

rahul

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