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Market stems sell-off but volatility is here to stay

Apr 8, 2014 @ 11:39 am

By Jeff Benjamin

Equity markets, S&P 500, Dow Jones Industrial Average, advisers, market performance
+ Zoom
(Bloomberg News)

The short and sudden streak of market volatility took a breather on Tuesday as traders took advantage of pullbacks by some of the higher-beta stocks. But financial advisers and market watchers are still telling investors to remain buckled in because the volatility probably isn't over.

“I think this remains a normal and healthy bull market pullback of between 4% and 8%,” said Paul Schatz, president of Heritage Capital. “This bull market is old and wrinkly, but it's still alive and well.”

Leading into Tuesday, a mildly positive day for stocks, the S&P 500 was coming off a decline of nearly 3% after hitting a new all-time high just two trading days earlier.

Like the large-cap dominated S&P, the Dow Jones Industrial Average also suffered a decline of only about 3% over a few tough trading days.

The bulk of the recent damage was suffered by the Nasdaq 100 and Russell 2000 indexes, both of which are heavily exposed to the higher-beta technology and smaller-cap stocks.

(See also: Bull market intact after “good flat” first quarter, but changes afoot)

“The momentum sectors peaked first and took it on the chin, but the large caps are holding up well,” Mr. Schatz said. “This is a routine and healthy pullback that will lead to more all-time highs this year.”

Five years into a bull market run and on the heels of a 30% gain by the S&P last year, it is not unusual for investors to get a little nervous when volatility picks up. But the general mood among the pros is that now is not the time to take money off the table.

“It's been a year and a half since we've had a pullback of at least 10%, so even some of my clients with cash on the sidelines are getting cautious,” said Mark Stancil, a portfolio manager at French Wolf & Farr Investment Advisors.

“From an advisory perspective, this is different than 1999, when folks couldn't get that last dollar invested fast enough,” he added. “Right now, if we saw some further pullback, I would view it as an opportunity to deploy some assets.”

Theodore Feight, owner of Creative Financial Design, said the recent stretch of market volatility is right on schedule.

“We're in the second year of a president's second term, and that usually represents a slightly down or flat year,” he said. “Right now, I'm trying to decide if I want to do some tactical allocations to the emerging markets and Europe, which have seen some improvements in the last 60 days.”

Meanwhile, Mr. Feight said his clients have not shown signs of nervousness, even after he installed a program that lets them measure performance on a weekly basis.

“Some say they like it, but others say they don't need to see the performance that often,” he said.

The weather that got so much of the blame for the economic slowdown in March could be the boost the market needs heading into the summer months, according to Mr. Feight.

“I've been telling clients that between the added costs associated with Obamacare and the weather, the markets are going to be down,” he said. “But the change in the weather could drive people back out to the stores for shopping.”

The brief market pullback looked more like opportunity than risk to Jack Rivkin, chief investment officer at Altegris Research and Investment Group.

“To me, the high risk is on the fixed-income side as opposed to the equity side,” he said. “I don't see any signs that the economy is actually rolling over to a very low or negative growth rate, and I'm not seeing anything that has me believing we're on a different path than we were a week ago or a month ago.”

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