With the recent volatility in the world stock markets we thought we would comment now rather than wait for the September Newsletter. As Always, be in touch with any questions or thoughts.
This is the best definition of Wall Street we know:
“The stock market is only indirectly related to economics. It is a function of human fear, greed and apprehension all overlaid on a business cycle”.
Jeremy Siegel in his classic book, Stocks for the Long Run, notes that most major market moves are not accompanied by any one specific news event sufficient to explain the price change. Since 1885 and looking at daily market moves of 5% or more, only one in four moves can be explained by a specific event. The moves recently confirm this. There is no one specific piece of news to account for the sudden drops.
So what does account for today’s volatility? There are three things. First, the U.S. stock market has been in a fairly consistent uptrend since March, 2009. We have had no major corrections. Investors are nervous about this.
Second, China is so much more important today than it was ten years ago. It is now the second largest economy in the world and accounts for a significant portion of global growth each year. Previously, we could set our watches to the fact that China would grow 10%+ per year. Now growth is down to 7% or 8% and many are questioning even this.
Finally, America has been the engine of global economic growth recently. But how much longer can the U.S. consumer continue to buy cars and houses if China is slowing, Europe is weak and a number of emerging markets (Russia, Brazil, etc.) are in political or economic disarray?
So what should you do now? For most investors the best advice is, stay the course. This is easy advice to give but difficult advice to follow, so let’s put it differently: diversify, be patient, and have self-knowledge.
Diversification is always good advice in an uncertain world. Make sure you have the cash you need for immediate needs so you don’t need to worry about short-term market vagaries.
Be patient and understand that volatility is just part of the market package. News headlines and emotions can drive short-term market movements, but longer term, stock prices will move up with increased corporate profits and dividends. The key to good long-term returns is buying when valuations are low, and if you do, you will be ahead of the game.
And finally, know yourself. Think back to how you responded to past periods of unrest and adjust your investment thinking accordingly and yes, maybe even adjust your investment portfolio if necessary. But don’t make long-term strategy changes lightly. Remember that the stock market is always working to ensure you are most optimistic when prices are high and most pessimistic when prices are low. Breathe deeply.