Pinnacle Investment Management Inc.

If you have turned on your TV or looked at a newspaper recently you could not have escaped the news that stock market volatility has increased and stocks around the world declined in January as concerns about a US recession grew. Since the US economy is so large and does such a large volume of trade with other countries, an economic slump in the US would be felt around the world. The US Federal Reserve, which has the dual mandates of both promoting economic growth and containing inflation, responded to these concerns about a potential economic slowdown by lowering interest rates 0.75%. The European Central Bank, whose only priority is controlling inflation, has not lowered rates as of yet.

The news media tends to highlight the bad news and frequently does not provide an objective view. Investors are left with the question of "how bad is the situation?".

My short answer is that investors have over reacted and that at current level the market is in the range of undervalued (if we assume that we are not facing a recession) to fairly valued (if we assume that we will have a moderate recession).

Even if stocks are attractively priced now, it does not mean that they cannot go lower. In the short run stock prices are driven by investors' emotions, particularly the emotions of fear and greed. In the long run stocks prices are driven by their economic value and rise as corporate profits rise.

Although the road has been bumpy, it is worthwhile to keep a few things in mind. History has shown that over time horizons of five years or longer, stocks provide investors with much better risk adjusted returns than do bonds. Trying to time the market, or making investment decisions based upon emotional reactions, more often hinders rather than helps investment performance. There is light at the end of the tunnel. According to Ned Davis Research, in the last ten recessions on average the stock market rose 16% within 3 months of the market bottom, 24% within six months, and 32% within one year.

At this time we are not making any investment changes as the result of market volatility. However we will be looking for investment opportunities in those areas where investors have significantly over-reacted. History has shown that the best way to make money is to be buying when others are selling.

Our goal is to help you achieve your financial goals while also allowing you to sleep at night. If this volatility is causing you concern, we should talk and potentially consider a change to your portfolio allocation.

www.Pinnacle-Investment.com

	Print Page
Contact Us