Emotions Took Control of Last Week’s Volatile Market

The volatility in the markets during the past week has been exceptional.
Looking back at more than a decades worth of data on swings in the Dow, the
moves on last Monday and Tuesday rank within the top 50 most erratic or volatile
days I've seen. They of course dont compare with the swings in 2008 during the
height of the financial crisis, and the current situation is nothing close this
is not a financial crisis, but a crisis of confidence in our political
leadership, in the state of our economic health and the broader economic health
of many countries around the globe. That said, consumer health has improved
dramatically since the mortgage crisis days, corporate health is astounding
given the amount of cash on balance sheets and growth in profits, and once
investors focus on this, the stock markets health will improve. This is not a
replay of 2008 except in the minds of investors who, once again, are shooting
first and asking questions later, if at all. Last weeks wild market moves can
largely be attributed to an emotional response to splashy headlines and are not
based on current market fundamentals, which remain encouraging. For example, one
of the biggest concerns following the ratings downgrade was that interest rates
would rise. This didnt happen in fact, its been the opposite, as yields on the
two- and five-year Treasury dropped to all-time lows this week and the S&P 500s
dividend yield is now hovering just below the 10-year Treasurys a strong
argument for stocks. If interest rates were higher and attractive, bonds and
even cash would represent reasonable and attractive alternatives to stocks. They
dont. Not even close. In low-interest-rate environments, price-to-earnings
ratios tend to be higher, and yet last Friday, P/Es were anything but high and
certainly not higher. Two weeks ago, a better-than-expected employment report
was a bit of a salve on the markets wounds. More jobs were created in July than
anticipated and numbers for both June and May were revised up a bit. While this
still is nowhere near the robust employment wed like this far into a recovery,
its surely better than the alternative. Thursday morning, the Labor Department
reported that unemployment applications were at a 17-week low, while the
four-week average fell to its lowest level since mid-April, suggesting that
layoffs had eased. Chain store sales numbers also were good, showing that
consumers are saving more and still spending. This could be further helped by
the big declines in oil, which should boost consumer balance sheets and bank
accounts as gasoline prices decline down the road. Cisco (NASDAQ: CSCO )
reported Wednesday that sales picked up in the last quarter, beating
expectations, while FedEx (NYSE: FDX ) and UPS (NYSE: UPS ) continue to raise
their rates, which suggests strong growth for the delivery giants. The current
crisis of confidence being played out in the markets and the media is hard to
stomach, but Ive chosen to be an investor, and part and parcel of that choice is
gritting my teeth and roughing out weeks like this. If I've done my job right,
my portfolios are in line with my risk tolerance and investment goals. If my
managers are doing their jobs right and I have full faith that they are theyre
exploiting every opportunity they can to put more cash to work, positioning me
to reap the benefits in the years to come.