After days like these in the markets we know people are concerned. So hopefully these thoughts can help add a little light to something that may seem very “dark” and confusing.
I could bore you with details and go on and on about the possible cause (China’s economy slowing, a strong U.S. dollar, the Federal Reserve possibly raising interest rates in September, the collapse in the oil sector as well as other raw materials, etc.) but remember there typically is not just “one” event that causes this much volatility.
So you may ask what these events (external factors) might have to do with the U.S. stock market. First, investors and market prognosticators are worried that individual companies that make up the stock market may begin to suffer lower earnings and slower revenue growth causing their stock prices to drop even more. Additionally, there are some views that these events could cause our economy to enter another recession.
In terms of the U.S. our economy is currently in the best condition around the world. Economic growth is not robust, but as economist Brian Wesbury says, “we are seeing a steady ‘plow horse’ type of growth.” And though our oil industry is in the “doldrums” the U.S. consumer and our banking system is in much better financial condition (since 2008). Other economic sectors such as retail sales, wages and housing starts are experiencing good growth.
In terms of the U.S. consumer we haven’t paid just $2/gallon for gasoline since March 2012, and unemployment is much lower with more Americans back at work today. And regarding China… keep in mind that our exports to China only amount to 0.7% (less than 1%) of our economy.
As I am writing this today, the U.S. stock markets have just rallied to close up over 600 points (almost 4% on the day) from recently being down approximately 12.5% from their annual highs. History tells us on average that we experience a 10% correction every 18 months (although the last was in October 2011) and 5% corrections occur as much as 4 times every 12 months. Also, looking at the calendar August through early October is typically a bad time in the market.
So is there a positive in all this… yes! There has been lots of money sitting on the sidelines waiting for lower prices to enter the markets. These type of swings in the stock market are “buying opportunities” for new money that has been waiting for a good entry point. During times like these investors can step in and “buy bargains” which also brings new money in to help support stocks. After a period of time markets typically recover and go on to set new highs.
Our suggestion? Step away from all this “clutter and noise” and try not to react. Remember what you voiced when you started investing… a long-term perspective and that you realized markets would fluctuate (go up and also go down). Research tells us when volatility kicks in, this is typically the time investors make “poor” investment decisions and suffer the consequences for years. If you simply have the urge to try to “fix it” or you can’t handle what’s going on, then get professional investment advice now.
Remember we are here to help. Please call us if we can help you or someone you know.