Here we go again – another panic on Wall Street. It is just over 4 months since the market had its last major swoon in August last year. On Friday the US stock market went down 2.1% and it has declined 8.48% since the beginning of the year. No one knows what the market will do on Tuesday when it opens after Martin Luther King Day, but there are many indications that this not a fundamental change in the market – the decline is driven by emotions. Pundits are claiming there are 3 main reasons for the decline – China, Oil and the Federal Reserve.
There is no doubt China has its own problems, but they have a minimal effect on the US economy. Sure we buy an enormous amount of “stuff” from China, but the US exported only about $100 Billion of goods in 2015. This equates to about 0.7% of the US Gross Domestic Product (GDP). It is difficult to remember 1989 when Japan’s economy imploded and really has not recovered substantially since then. It was not the end of the world and the US and world economies have grown substantially in the 26 years since then.
Sure the price of oil going below $30/barrel is hurting the oil industry and the banks lending to the oil producers and associated industries, but we are not mirroring the 1980’s which precipitated the Savings and Loan crisis. Overall banks are much better capitalized than the 1980’s and 2007 for that matter. Today banks have almost double the reserves that they had just before the Great Recession of 2008.
After the Great Recession in 2008 the Federal Reserve (Fed) bought a huge number of bonds, which was called Quantitative Easing (QE). We have had 3 rounds of QE, which were supposed to increase the liquidity in the economy, to stimulate economic growth. Instead the private banks just held onto the money that was supposed to be ploughed into the economy and essentially did not lend these reserves out, as the Fed had hoped. So last month’s 0.25% increase in the Federal Funds rate is not going to cause a squeeze in liquidity in the economy (or any increases in the near future).
What Do You Do?
The market has gone down more than 5% eighteen times since the end of the Great Recession in March 2009, and each time the market bounced back to hit new highs. No one knows what the market will do this coming week, but I urge you not to panic. Stay the course and stick to your investment plan that you have established. Invest for the long-term and do not let emotions derail you now! Let me know if you have any questions specific to your portfolio and personal situation.
January 17, 2016