In addition to global economic contagion fears related to ongoing activities in China and market impact fears over what was presumed to be a likely interest rate hike by the Fed in September, we believe that a large part of the recent market pullback can be attributed to the overwhelming market belief that we are long overdue for some form of a market pullback or correction. Following this line of thinking, this pullback or correction would slow down the record bull market run that the stock market has been on since March of 2009 and return the market to more reasonable trading levels. As a result, investors may be using recent market volatility to take some profits and reallocate risk based assets to other areas of the market under the presumption that this is “the big market correction” that everyone has been anxiously awaiting.

On the other side of this downward momentum is all of the cash that has been sitting on the sidelines waiting for the aforementioned pullback to occur before allocating more investment dollars to the market. Pullbacks are not uncommon and this one may actually be constructive for future market growth potential. In fact, looking back to 1996, the stock market, as defined by the S&P 500 index, historically has finished the calendar year with a positive annual return 14 different times when it experienced either an intra-year pullback of greater than 5% or a correction of greater than 10%. While 2015 may prove to be different, a turnaround by year end is not without historical precedent.
Year Intra Year High-to-Low Yearly Price Gain.

The two competing investor sentiments described above, across both institutional and retail investors, are likely causing the majority of the widespread, whipsaw volatility that we have seen in recent days.

If investors believe, as we do at Hennion & Walsh, that we are still in the midst of secular bull market, and that the global economy is more likely to continue to slowly recover, as opposed to retreating into an outright recession, these types of pullbacks can create opportunities and attractive entry points. On the other hand, if these types of pullbacks lead to greater investor angst and fear, these investors may make short-term, often emotional, decisions and be driven out of the market entirely as they come to the realization that they do not have as large of a risk tolerance as they initially thought they had when markets were moving higher over the last 6 + years.

It is important to remember that yesterday’s leaders will not necessarily be tomorrow’s leaders and markets do not always trade rationally – on the downside or the upside. Hence, building and managing a diversified growth portfolio with a longer term perspective that includes asset classes and sectors of the market that are not perfectly correlated with U.S. Large Cap Stocks (i.e. “the market”), in our view, is critical in the days and months ahead.