These past few weeks have done a fine job of reinforcing the effective impossibility of short-term market predicting. From Christmas through Groundhog Day on 2 Feb, we had a market drop of over 5%. Corrections […]
I wanted to add a couple thoughts to what I wrote in my market letter last week about the current market moving, in case you still had concerns.
Last weekend, financial blogger Ben Carlson pointed out that “sharp drops in the market transfix our attention, with short-term losses overshadowing our awareness of longer-term gains.” In other words, folks instantly forget how well they’ve been doing and simply default to the world is ending mode that’s still is hanging around when the headlines cause some market moves.
Many investors seem to be of the opinion that, in general, the stock market is more volatile than it used to be. That’s because the Dow has routinely been moving up – or down – at least 100 points in a day. That’s a nice round number that sounds large and important. However, even after the recent spike in volatility, the market has fluctuated far less sharply in the last three years than has been typical in the past. And, even after the market’s recent selling, 100 points is only about a 0.6% change in the Dow.
My point is, when hearing about the Dow daily results, make sure you check the actual percentage changes, not just the point changes, before even thinking about being concerned. As was the case Monday, the drop of 588 points represented a percentage drop of just 3.6%. In 1987, a 508 point drop represented a loss of about 22%, due to where the Dow was then. That was a Black Monday – yesterday was more of a very light gray…
Every time we see a stock market correction, we get this flood of opinions about “what investors should do.” Worse, the further markets drop, the noisier things tend to get. That volume seems to be getting louder by the day. If you have a strategy in place, you should be able to almost immediately recognize which pieces of advice make sense for you and your situation. That’s the whole point of setting reasonable expectations ahead of time and allowing for a wide range of market outcomes through the asset allocation process. Corrections are healthy only when they happen to other people’s stocks.
Corrections, defined as short, sharp, sentiment-driven drops of 10% or more, are normal in bull markets. As of Monday’s close, we now have the sixth correction of this bull market, going back to 2009. Corrections can be emotionally difficult to sit through for some, but they usually end as suddenly as they begin and the recoveries are often swift and strong. Enduring these short-term gyrations is the price you pay for bull markets’ strong long-term returns. If you’re investing for long-term growth, riding these ups and downs is absolutely likely to reach your goals.
Corrections don’t usually end overnight. Recovery pops in the market are usual but, “studies have shown” that it takes about 1.5 times as long to get back to where it all started as it did to drop. So, round numbers, this translates to about October.
What about China?
Well, all the media noise has been focused upon the Shanghai market – one which international investors are effectively shut out of. If you want a better representative view, check the Hang Seng Index. This is based in Hong Kong, is tons less volatile and is the port for most investments in Chinese companies for global investors.
According to Goldman Sachs, S&P 500 companies generate roughly 67% of their aggregate sales from inside the US. Just 8% of overall revenue comes from the Asia-Pacific region. And, while US exports account for roughly 13% of total US gross domestic product (GDP), China accounts for less than 1% of those exports.
Also according to Goldman, the correlation between US economic growth and Chinese growth is relatively low, “Our US Economics colleagues estimate that a 1 percentage point (pp) decline in Chinese growth would translate into a modest 0.06 pp reduction in US GDP,” the bank wrote.
These issues can definitely stir up sentiment…and they might keep doing so for a while longer. But, as Ben Graham so famously said, “In the longer run, markets weigh fundamentals.” On both of these fronts, I’m seeing lots more good than bad. By the way, even if China slows this year and their economy grows just 5%, it would still add about $500 billion to world GDP. That’s not a recession…quite the opposite.
At home, a continuously improving labor market, more growth in housing construction, and increased consumer spending should make our economy able to deal with any slowdown overseas.
Short version. Don’t sell. Peter Lynch provides a more enlightened response when he says, “It is not entirely clear what causes deep market corrections (a clear prove that markets are irrational), but, without them, many of the best performing long-term investors would have never achieved their spectacular returns.”
To get the returns, you have to be in – and stay in – the market.
All my best –
Securities and Investment Advisory Services offered through KMS Financial Services, Inc.
To get an overview of economic conditions, use this link. It’s updated monthly. http://www.russell.com/helping-advisors/EconomyMarkets/EconomicIndicatorsDashboard/EconomicIndicatorsDashboard.aspx
Past performance is not indicative of future returns.
Investing in securities of any type involves certain risks, including potential loss of principal. Investment return and principal value in a bond and/or securities portfolio will fluctuate so that investments, when sold or redeemed, may be worth more, or less, than the original investment.
Investing in sectors may involve a greater degree of risk than investments with broader diversification. International investments are subject to additional risks such as currency fluctuations, political instability and the potential for illiquid markets. Investing in emerging markets can accentuate these risks.