The recent decline in the equity markets has been uncomfortable, to say the least. As mentioned in a previous post, we wouldn’t have been surprised by a correction of 10 percent and would take advantage of such an occurrence to add to high-quality equity positions to portfolios.

What we did not expect was a rapid descent surrounded by tremendous volatility.

We still maintain our position that a rate increase by the Federal Reserve, whenever it arrives, will not dampen the prospects for domestic equities, although we do expect some volatility surrounding any announcement by the Fed.

Despite the recent rally, the world has been in a “risk-off” mentality since mid-August. Fears of a decelerating Chinese economy and global growth in general, significant downward pressure on emerging market currencies and the prospect of an interest rate hike in the U.S. sent investors for the exits. More than $9.2 billion was redeemed from equity mutual funds during August, in addition to $21.53 billion liquidated from taxable bond funds, according to the Investment Company Institute, an association based in the District of Columbia. The U.S. Treasury 10-year yield moved lower as investors sought a safe haven for their investment capital. This “risk-off” capital will have to find a home again. Interestingly, U.S. Treasuries are the “risk-off” instrument of choice for global investors.

As we speak to our managers, they all point out that many high-quality companies appear to be trading at bargain prices. The U.S. economy remains on a stronger course and stands out as a bastion of stability, compared to most other countries. The unemployment rate has dropped to 5.1 percent. Second-quarter GDP was recently revised to 3.7 percent. Productivity continues to rise, and we believe merger and acquisition activity may reach a record in 2015. U.S. companies are expected to return $1 trillion to investors through repurchase programs and increased dividends this year. Valuations have become more attractive — and we like what we see.

During the qualitative easing years, the U.S. was considered by many to be the risk market of choice for investors around the world, whether it was equities, bonds or New York condominiums. Global QE has created an immense amount of investment capital. That capital needs to generate returns for its owners. At some point, we will go back to a sustainable “risk-on” mentality. When this happens, we believe the U.S. equity markets are the first place investors will look.

This is not a trading call. We are long-term investors. Looking back three to five years, we believe this current market dislocation will look like a buying opportunity.

The rough ride may not be over, but it may be time to start deploying capital to domestic equities on pullbacks. We are recommending index funds for large-capitalization growth, large-cap value and dividend-oriented strategies. Small- and mid-cap stocks look especially attractive, because most of these businesses are oriented toward our domestic market. Lower energy and commodity prices are reducing input costs and these companies face fewer headwinds from a stronger dollar. We advocate active management here. We are not reducing European or emerging market equity exposure. Hedge funds have validated their place in portfolios during this dislocation. We continue to keep the duration short and credit quality high in bond portfolios.

As always, long-term success is about asset allocation and rebalancing. While it is impossible to time market bottoms and it always feels wrong to step into declining markets, we’re taking the long view and are beginning to slowly increase our allocation to high-quality U.S. stocks.

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High-Quality U.S. Stocks Are Trading at Bargain Prices originally appeared on usnews.com