August 24 2015

 

Recent Stock Market Decline

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Over the last week, the markets have taken a beating. The overall US stock market has declined 9.9% since last Monday[1], which is in line with the overall international market which has gone down 9.7%[2]. The overall bond market held steady by going up 0.4%[3].

 

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Let us take a look at the big picture for the US stock market. Today’s close is off 11% from the recent historical high of the market on June 23, 2015. Going back to the market bottom early in 2009, today’s close is up 203.5%.

 

What has caused the Recent Decline?

It is definitely not logical that the market has corrected almost 10% in one week, but when have the markets been rational?

 

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China is definitely spooking the markets, with the slowdown in their economy, but this should be of little concern to us in the US. Our exports to China account for only 0.7% of our Gross Domestic Product (GDP). The Chinese Yuan has depreciated 3.6% versus the US dollar over the last 12 months[4]. Compare this to the losses of the Japanese Yen (-17.7%), Euro (-16.5%) and British Pound (-7.1%) versus the US dollar.

 

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The oil glut and low oil prices definitely affect our market as energy stocks consist of about 8% of the S&P 500 index. Remember, that lower energy prices help most businesses and consumers. One of the reasons we have not seen a dramatic drop in prices at the pump, is because of supply problems at US refineries.

 

Another factor that could have helped trigger the recent market decline is the talk by the Federal Reserve about raising interest rates next month. Wall Street is terrified at the prospect of their access to ultra-low interest rates ending. We all know the lobbying power of the large Wall Street banking institutions, who have been instrumental in the Federal Reserve delaying rising interest rates for such a long period.

 

Putting it all in Perspective

Admittedly, over the 6.5 years since the market bottom in 2009, there has not been a 10% decline in one week, but we are investing for the long haul, and our retirement and financial security is not made or lost in one week. Saving for our future is a long lifetime process, with the inevitable fluctuations in the markets. I don’t see a change to this long term pattern.

 

Let us look at the overall picture of the US economy[5]:

  • Private sector jobs have increased for the last 65 months
  • Auto sales are at record highs
  • Housing and construction has improved dramatically
  • Corporate profits continue to grow (with the exception of energy)

 

What should you do about it?

Remember, there are very few people who are invested 100% in the stock market, so the scaremongering of the media does not affect most people as dramatically as we are lead to believe. If your portfolio consists of 50% in stocks, last week’s sell-off would only have resulted in a “paper” loss of 4.7%.

 

What should you do now?

  • First of all try not to fixate on the news. Remember, negative news gets more attention, hence all the hype. Turn off the TV!
  • When did you last rebalance your portfolio? Your portfolio is probably out of whack from your target allocations.
  • Take a deep breath and do not panic.
  • After a market correction, no one knows what the market will do next. Even the professed experts get it wrong 99% of the time, so don’t think you can outsmart the market.
  • Remember patience and diversification are your tools against market uncertainty.
  • Do not make rash decisions based on emotions – you do not want to join the sell low, buy high crowd.

 

If you have any questions for me specifically about your personal situation, please give me a call or send an email.

[1] Vanguard Total Stock Market ETF (VTI)

[2] Vanguard Total International Stock ETF (VXUS)

[3] Vanguard Total Bond Market ETF (BND)

[4] Bloomberg, Daily data from 8/12/2014 to 8/12/2015

[5] Summarized from First Trust’s Monday Morning Outlook, “This Correction is Technical, Not Fundamental”, Wesbury & Stein, 8/24/2015