Why the Last Two Days Are a Good Reminder of Why It’s Important to Take a Long-Term View
As you have likely seen in the news, over the last two market days the Dow Jones Industrial Average (DJIA)i declined 7%. However, it is important to remember that even after the last two days, the DJIA is up 20% over the last year; a great year by historical standards.
What has driven the recent drop? From my perspective, there are three factors:
- Investor profit taking. Given the appreciation of U.S. equities over the last few years, some investors may be exiting positions to realize profits.
- Trading algorithms. As traders’ use of trading algorithms have become more commonii, declines in a market can have a ripple effect and even exacerbate declines in other markets.
- Anticipated Federal Reserve rate hikes. Strong wage and job growth, while signs of a strong economy, also signal that the Federal Reserve may increase the Fed funds rate to prevent ‘overheating’ which can contain economic growth.
Looking forward, there are two primary reasons why we remain optimistic:
- History. This is not the first time we have seen this. Since 1987, there have been six instances where the DJIA has declined by 7% over a two-day period. In those six instances, the market on average increased 7% over the next 12 months
- Strong U.S. economic fundamentals. Based on recent job growth, wage growth, and the lowest rate of unemployment since 2000, we believe the U.S. economic outlook remains positive.
While we remain positive about the outlook, the last few days remind us that the market can be volatile, and that it is important to take a long-term view and stay the course.
Should you have any questions please reach out to your HD Vest Advisor.
Chief Investment Officer
The views and opinions presented in this article are those of James Hickey and not of H.D. Vest Financial Services® or its subsidiaries.
Securities offered through H.D. Vest Investment ServicesSM, Member SIPC, Advisory services offered through H.D. Vest Advisory ServicesSM, 6333 N. State Highway 161, Fourth Floor, Irving, TX 75038, 972-870-6000.
Investments in individual sectors may be more volatile than investments that diversify across many industry sectors and companies. Certain sectors of the market may expose an investor to more risk than others.
i Dow Jones Industrial Average is unmanaged and measures broad market performance. It is not possible to invest directly in an index.
ii Investopedia, 2015