Markets extended their volatility into this week after the Dow closed down 5.8% last week. On Monday, the Dow was down 1,089 points at one point, the largest intraday drop in history. To illustrate the size of the swings seen on Monday, we need to look no further than just a few stocks. For example, GE was down 21% intraday before closing down 3%. Apple dropped 13%, recovered and was up nearly 3%, then closed down 2.5%. Ford was just one of many stocks that was briefly halted from trading due to “extreme volatility”. The VIX, a measure of market volatility calculated from trades in S&P 500 option contracts, was not even able to be priced for the first half hour of trading due to the chaos in the option market. On Tuesday, the markets open higher, but selling pressure quickly overcame the market and we saw another down day, with the Dow closing down nearly 200 points. Then on Wednesday we saw the biggest one day rise in Dow history, with the market closing up nearly 600 points.
This week demonstrates the importance of looking at your portfolio with a long-term focus and ignoring the “noise” that we see on a day-to-day basis. U.S. market fundamentals remain strong and while there are still headwinds, the economy is in much better shape than we were in 2008 (or even 2012 when the last correction took place). We believe investors who remain committed to their asset mix and use a diversified portfolio have the best opportunity to smoothly navigate these volatile markets. This is when investors should look for opportunities to rebalance and add to quality companies that have been oversold.
Below is a chart that shows the largest intra-year drop in the market and also how the market finished in that year. The average of these “drops” is 14.2%, larger than the one we experienced this past week. Annual returns during these periods were positive in 27 of the 35 years (77% of the time).
U.S. GDP Numbers Revised Upward:
The Commerce Department announced yesterday that the U.S. Gross Domestic Product (GDP) in the second quarter rose much more than was first reported. Originally estimated to be 2.3%, the number was revised upward to 3.7%. Consumer spending, which makes up more than two-thirds of GDP, grew 3.1%, up from the 2.9% that was originally estimated. Growth in spending on home building/improvements was revised upward from 6.6% to 7.8% and is expected to continue in the third quarter. Home building is considered a very important measure of economic activity because of the trickle-down effect…home buyers need to furnish their homes with appliances, furniture, lawn equipment, etc. Inventories rose in the second quarter, which contributed to GDP. However, inventories have risen to the point where economists feel it is unlikely to keep rising. Economists are expecting falling inventories in the third quarter, which will drag on GDP.
This GDP revision supports that case that the U.S. economy is continuing to strengthen which could provide the Fed further evidence to begin to raise rates this year. While recent market volatility may have an influence on the timing of their decision, economic data continues to justify a rate increase.
Tax Loss Harvesting:
In wake of the recent volatility there are not only opportunities to buy stocks at lower prices, but there are also ways to capitalize on positions that have unrealized losses in nonqualified accounts. Investments owned in a taxable account (individual, joint, trust, etc.) can be sold for a capital loss and these losses can be used to offset future capital gains. If losses exceed realized capital gains in a given tax year, up to $3,000 of the losses can then be used against earned income, with the remainder of losses carried forward to the next tax year. If the investment is still one you favor in the long term, you can re-purchase shares, either 31 days before you sell for a loss, or 31 days after you sell for a loss, to avoid IRS wash sale regulations (where the loss would be disallowed). This strategy gives you the ability to use the losses to help reduce your current year taxes, while also still owning the same position in your portfolio at a lower cost basis.
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