The Sky is Falling
Well, not quite. In the past week, we have seen the S&P 500 (the broad U.S. stock market, generally speaking) drop roughly 7%. This represents nearly the entire drop in the S&P on the year. Prior to this past week, the market was more or less flat year-to-date, oscillating up and down after a strong start to the year. Foreign markets are faring no better, and in many cases dropping precipitously. Such is the case with China’s Shanghai Index, down more than 40% from its peak in June. On an intra-day basis (prior to intra-day recoveries), the S&P actually dropped into correction territory (down 10% from peak).
What’s Causing the Corrections?
Unlike major corrections, the current drop is being fueled by a number of factors. But the primary drivers seem to be weakness in the Chinese economy, concerns about the Fed raising interest rates, and the current weakness in oil prices. But the reality is that, despite all the speculation, nobody really knows why the market moved the way it did the past several days. Realistically, it was nothing more than pent up market emotions coming to a head.
Moments like this demonstrate the importance of a well-diversified portfolio. Over-reliance on any particular asset class, sector, or “theme” can wreak havoc on a portfolio. At the same time, significant selloffs create an opportunity for investment managers to buy quality investments at a discount, or at least at a reasonable price.
What’s The Outlook?
While the continued global economic recovery has been slow and gradual, it has also been consistent (and persistent). From the perspective of most economists, virtually nothing has changed about the overall economy to prompt any type of bear market scenario. Employment continues to improve (albeit slowly), consumers are continuing to spend, and debt levels are not considered a problem.
Fortunately, unlike recent bear markets, there is no major impetus for concern. Oil prices could certainly be a problem, but the upside of low oil prices is more cash in consumers’ pockets to spend. We’ve been talking about Fed rate adjustments for years, so most of that concern should be emotionally priced into the market. Of course it all falls back to China. A major downshift in economic activity in China could have wide implications. But despite that, the US economy still looks robust.
The bottom line is that there is no tech bubble bursting like we saw 15 years ago, and no subprime mortgage crisis to contend with. What we have is a fear about prices. Investors are concerned about being caught with over-priced assets in an over-priced market. But other than during market bubbles, high stock market prices are generally not a cause of major stock market declines. What we CAN expect is continued volatility, well into the fall.
What it Means for Portfolios
Not a lot. It’s important not to make knee-jerk reactions to what are periodic and normal market drops. The markets has gone up relatively uninterrupted the past seven years, with a handful of material drops along the way, most notably in April 2010, August 2011, May & October 2012, and September 2014. So this drop seems right on schedule. While it may prove to be nothing more than a routine pullback, it could certainly evolve into something a bit more sinister. History would not suggest that, but it’s not beyond possibility.
Robert Henderson is the President of Lansdowne Wealth Management, an independent, fee-only advisory firm in Mystic, CT. His firm specializes in financial planning and investment management for retirement, with a special focus on the particular needs of women that are divorced or widowed. He is an Accredited Asset Management Specialist and a Certified Divorce Financial Analyst. Mr. Henderson can be reached at 860-245-5078 or firstname.lastname@example.org. You can also view his personal finance blog,The Retirement Workshop at http://lwmwealth.com/blog and the firm’s website at http://www.lwmwealth.com.
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