Friday started with some positive news as non-farm payrolls increased 117,000 in July, beating expectations for an 85,000 gain. Not only that, but employment growth over the past two months was revised up an additional 56,000 jobs.
But contrary to the belief among some that markets and the economy would rebound once employment improved (not a belief we share—high unemployment is a result of past economic weakness, not a cause of future weakness), stocks actually went on a roller coaster ride Friday, falling as much as 2.5% or so and closing…just flat. A lot of whipsawing to get no change over yesterday.
In a way, this serves as a bit of a useful illustration of recent market action in general. The reality is, no one factor determines subsequent market action over a longer period—a point demonstrated well earlier this week in the debt ceiling deal’s wake. While the debt ceiling drama no doubt contributed to volatility in July, it certainly wasn’t the only thing going on in the world—and wasn’t even all that material, in our view. So as we indicated here, the debate’s resolution wasn’t likely the sole magic bullet markets were waiting for to move higher. (What’s more, no such magic bullet exists.) Rather, volatility ensued…all week. And again, some much-anticipated positive news (employment improvement) was met with a roiled response that ultimately was no more than a shoulder shrug.
But markets being down at one point over 2.5% intraday was no more indicative of the day’s subsequent close than recent market action is indicative of where stocks likely head over the next 6, 12 or 18 months. Make no mistake, volatility can be very uncomfortable to live through. But it’s important to put recent volatility in context—corrections of this magnitude and even greater are quite normal during the course of any bull market year. To wit, we had one in 2010 that was bigger than this one (currently) is.
We expected this year to be a tumultuous, frustrating one for investors—and so far, 2011 has delivered frustration in spades. But it needn’t prevent extant positives from adding to upside volatility as well (and yes, up or down, it’s all volatility)—factors like better-than-expected corporate earnings, ongoing global economic growth, stocks being attractively valued (and more so now), etc.
But recent market volatility being normal and in line with what we’d expect in an overall choppy year doesn’t take away from the discomfort of enduring it, nor does it prevent a bear market or recession from cropping up down the road. But how far down the road is very much an open question—more open than some in the media would have you think. At this point, we don’t see a bear market in the near term, but we won’t be surprised by ongoing, at times painful market volatility. Either way, a knee-jerk reaction to near-term price movements—without considering a long-term market outlook—can ultimately do more harm than good.