Still looking past
scary headlines
Look past scary headlines, seems like the appropriate title for this article as a jarring correction in the stock market this past month has created uneasiness, as some of you have shared with me.
I can't help but be reminded of a comment by John Bogle, retired CEO and founder of the mutual fund giant, the Vanguard Group, "Don't pay a lot of attention to the volatility in the market place. All these noises and jumping up and down along the way are really just emotions that confuse you."
The question shouldn't be, "Will my investments go up or down?" They will. Instead, ask, "Will the fact that investments go up and down bother me enough to do something dumb?"
In other words, Bogle is saying that volatility is part of the DNA of the market. Stocks go up, and stocks go down. Historically, stocks have gone up a lot more than they have gone down. But from time to time, they do go down.
Stock market corrections, defined as a decline of 10% to 20% of a major market index, typically the S&P 500 Index, are a normal part of the investment landscape. In the context of an expanding economy they are healthy when valuations get a bit extended, as they wipe out excess enthusiasm, reduce valuations, and set the foundation for another round of gains.
Yes, I know it sounds a bit clinical, and recent volatility has been unsettling. I recognize that. But swings in the market are normal.
But let's be clear, volatility can be managed by investing in a diversified portfolio that seeks out long-term capital appreciation, a modest degree of stability, and income.
What's going on? China and the Fed
It's a question that has come up often in recent meetings and discussions with clients. In reality, it's hard to pinpoint the exact cause for the recent selloff, but first I'll cover some of the negative headwinds.
China is the world's second largest economy, and its growth rate has been slowing. Although China officially announced that Q2 GDP expanded by 7.0% in Q2 (Bloomberg), few believe the official report.
The most immediate impact has been in emerging market currencies, which are grappling with China and a possible Fed rate hike.
In addition, China surprised markets by devaluating their currency on August 11 by about 3% (Wall Street Journal). China's central bank (website press release) billed the surprise announcement as a market-oriented reform and a one-time move.
Liberalization is welcome, but the timing seemed to coincide with its sagging economy. In other words, it's a way for China to boost exports.
Here's the rub with the exception of the devaluation, China's economy has been slowing for quite some time. So, it's old news that should have been priced into shares.
Even the surprise devaluation was quite modest. Declines in other currencies against the dollar over the last year or two have been much more extensive. But there was little reaction in the market.
A second problem-U.S. exports to China make up less than 1% of U.S. GDP (U.S. Census). It's insignificant, so it's a bit puzzling why stocks would lurch to the downside when the U.S. economy isn't dependent on sales to China.
U.S exports to Canada are almost triple those to China (U.S. Census) and our friends to the north have entered a recession (Reuters), but no one's blaming market problems on Canada!
The Federal Reserve is also being blamed for the selloff. In late July and early August, markets seemed resigned to the idea the Fed was set to boost rates at its September 17 meeting, but global instability and conflicting views from various Fed officials have only added to the uncertainty. Will the Fed or won't the Fed hike this month has investors on edge.
Nonetheless, like China, this is an old story. The Fed has been aiming at a possible September rate hike for months. The added uncertainty can create anxieties, but in my view, it's hard to pin all of the correction on the Fed.
Bottom line
If you are a number of years from retirement, a drop in the market may provide an opportunity to selectively deploy any excess cash.
If you are nearing retirement, your portfolio should be adjusted for risk, so it is designed to be less volatile in both up and down markets.
As I've said before, the financial plan we've recommended incorporates market declines. As I've said before, we've recommended a financial roadmap that's tailored to your financial goals. We don't know when we'll run into traffic jams or hit a pothole, but we believe that detours or deviations from the plan will hinder not help your progress.
Patience is the key. As Warren Buffett once said, "No matter how great the talent or efforts, some things just take time. You can't produce a baby in one month by getting nine women pregnant."
I trust that you have found this month's summary to be beneficial and educational. I always emphasize that as your financial advisor, it is my job to partner with you. If you ever have any questions about what I've conveyed in this month's message or want to discuss anything else, please feel free to reach out to me.
As always, I am humbled that you have placed your trust in my firm. It is something I never take for granted.
