By Art Haws for the Nashville Business Journal | August 2015
The recent downturn in the financial markets has caused significant unrest within the institutional investment community, and what is becoming a heightened sense of panic for the individual investor. To make matters more intense, the financial media has jumped on board using their usual vernacular of gloom and doom.
While recent market developments may seem like a very dramatic economic event, in actuality it is what is referred to as a “correction” which is defined as a 10% decline in the market. We essentially entered that correction territory last week.
The stock market, as measured by the S&P 500, has seen a positive return in 27 of the last 35 years. On average at some point during each of those years, the market was down 14.2%. So while the immediate news is admittedly grim, this activity is far from unusual. And because we have not seen a correction of this scope since 2011, some investors have forgotten what a downturn feels like.
Here are some big picture things to consider moving forward.
The impact of China
One of the primary challenges with the Chinese market is its lack of transparency. China was the world’s primary benefactor of the credit bubble leading up to 2007, but since that time, we have seen a deleveraging within the global economy which accounts for part of the turmoil we are reading so much about today. In addition, China’s reliance on its government’s involvement — for example the current devaluation of its currency — make it a unpredictable player in the international marketplace.
If interested in investing in China, one might consider companies in developed countries (i.e. the US & Japan) that contribute to its economy
Is it prudent to move my S&P stocks to bonds or gold?
During market corrections, broad moves from stocks to so-called safe havens such as bonds and/or gold is a common refrain. Bonds and gold (among others) can be a part of a diversified portfolio, but wholesale moves from one asset class to another often turn out to be detrimental to long term returns. It is important to avoid short term emotional decisions and maintain a well thought out investment strategy especially in times of uncertainty.
Will the Fed really raise rates in this economic climate?
This is the question that is perpetually debated by market pundits and financial media. However, the bigger question you should be asking is to what degree does a potential rate increase actually matter.
Many informed investment professionals already feel that a 25-50 basis point increase has already been priced into the equity markets. If the Fed does increase rates without forcing the economy toward recession, it could eventually strengthen the U.S. and global economy by tempering undue inflation.