Perspective on US and Global Markets

In light of the volatility in the investment markets the past few weeks I thought I'd share some information I've been studying that answer the two most common questions I've been hearing. I'll try to keep it brief and understandable, if you'd like more detail just let me know.

Why are stocks dropping so much?

Three thoughts on this:

#1 Keep in mind that when the Dow Industrials are at 25,000 a 300 point decline is only 1.2%. Back when I started in this business and the Dow was at 2000 a 300 point drop would have been very significant, but at today's levels we need to look at percentage change to not get overly freaked out.

#2 The markets have actually been in a well-defined uptrend for many years, and this is (thus far) a correction within that trend. We got a little above the trend this summer, now we're back into the channel:

#3 The Federal Reserve has been raising interest rates for almost two years now in an effort to slow the economy down and contain inflation. While the economy has thus far continued to expand at a good pace, markets are starting to accept the inevitable: economic growth in coming years will likely be slower than past years, and thus stock valuations should decline to reflect slower growth.

I saw that the stock market was up a lot through September, how come I'm not up that much in my portfolio?

There's a simple but unusual answer to this: the US stock market has been one of the strongest markets in the world this year, so owning stocks in almost any country other than the US meant your overall returns were less than how US markets did. Normally US and foreign economies (and stock markets) move in tandem, with minor differences in performance. In fact, last year foreign markets did slightly better than the US market. But the difference this year has been very notable. Here's a look at the US stock market (S&P500) versus Europe/Asia (EAFE) and also emerging markets (MSCI EMI) since the financial crisis:

That then begs the question of why we have any money invested in markets outside the US. The answer is that over time diversification works. Here's a longer-term look at how the US sometimes does better than other markets and sometimes does worse:

I hope this info helps to answer questions you may have, but feel free to contact me if there's anything else you'd like to discuss.

Sincerely,

Kevin