The Japanese Nikkei was down -6.35% last night and is down -22% from the high. Chinese stocks were down -2.8%. Japanese money managers sold a net 386.9 billion yen of foreign bonds and a net 221.8 billion yen of overseas stocks in the week ended June 7. The put/call ratio on U.S. equities is surging suggesting that fear is elevated. Concerns regarding QE tapering combined with falling inflation expectations is creating high volatility and selling pressure in gold, bonds and stock markets. With fundamental growth on track in the U.S. and with Bernanke’s press conference next week, we would not be surprised to see a short-term snap back in equity asset valuations.
Looking at the recent loss of value in Japanese equities, gold, high dividend paying U.S. stocks, and bonds including inflation protected Treasuries, it is evident that all major asset classes can suffer periodic significant drawdowns. Over the past twenty years, U.S. stocks have suffered roughly 20%+ drawdowns about once every five years. We strongly believe investors should have a plan in place to avoid these significant down periods before they buy equities.