It’s been some time since the stock market has shown this type of volatility—and even longer since there has been a correction, which the Dow Jones Industrial Average suffered early this week, when the peak-to-trough swing in that blue chip composite exceeded 10% from its late January high to its intraday low on February 5th. On point, Friday’s jobs report sent the DJIA down 666 points followed by a record setting point decline of 1,175 on Monday. These declines may have been set off by investor nervousness regarding the rise in non-farm payrolls, the moderate increase (2.9%) in average annual wages, and speculation that the Fed might opt to raise interest rates as many as four times this year. Monday’s loss may have been exacerbated by computerized trading algorithms that at one point had the Dow down almost 1,600 points. That index regrouped some, but still closed down the aforementioned 1,175 points. Monday’s record-setting point drop was large, but in percentage terms, the 4.6% fall, although painful for market participants, should be kept in relative, historical perspective. The low volatility and unrelenting push higher by the equity market over the past year has made us look at such selloffs with, perhaps, more trepidation than they would otherwise deserve. Encouragingly, yesterday’s action saw the Dow rebound by a reassuring 567 points at the close, albeit with large swings during the session.
Importantly, prudent investors will stay the course and not panic. Over time, we expect the market to recover and resume a modest upward trend. Long ago, Value Line developed a unique investment model, free of emotions, to guide our subscribers in what portion of their investment portfolio should be in equities at any given point in time. Our current recommendation based on our model is the range of 60% to 70% in stocks. We recommend no big changes if your portfolio is in that range – although you might edge toward the lower end of that band for a bit more safety. In making new investments, be attentive to the Value Line Safety rank on each stock. Equities ranked 1 (Highest) or 2 for (Above Average) for Safety normally weather major corrections much better than other stocks do.
Thank you for continuing to rely on Value Line for the best independent analysis of the notable companies traded on the North American exchanges.
