It has been quite some time since we have experienced as volatile a week as we have in the one just passed. For the past twelve months it looked as though the markets were in an “internal” correction. While the major market indexes were remaining within a couple of percentage points from their all-time highs, the broader market was reacting quite differently. Of the 4000 publicly traded stocks, nearly 45% were down more than 20% from their highs. And 24% of all stocks were down more than 40% from their highs. This was all before the selloff that began last week!
Destabilizing news keeps coming from China regarding their economic slowdown and how, if it continues, a worldwide slowdown would emerge. China worked to jump start their exports last week by surprisingly devaluing their currency in an attempt to make their products more lucrative to export. This move, of course, has a negative effect on other countries exports.
China’s moves, along with the other issues of the lingering Greek bailout, falling oil prices, and the waiting game we are in with our Federal Reserve to see if they will or won’t begin raising interest rates, finally may have worn out short term traders first, followed by some of the general public that still worries about another major recession.
Equity markets on average experience a 10% correction every 18 months. The last correction was nearly 4 years ago, far exceeding the average duration between corrections. Technology has advanced to a degree that many programs will automatically trade vast sums at predetermined levels no matter what causes those levels to be reached. Once markets begin to fall, or rise in the opposite scenario, these programs feed off each other and can cause very volatile moves like we are currently experiencing.
Facts are that the economy here in the States is actually improving, although at a slower pace. Hundreds of billions of dollars here is slated for refineries, chemical plants, and processing factories between now and 2017. Heavy equipment, trucks, cranes, etc. are being ordered at a rapid pace which would only happen if the future looked bright for these industries. Of companies reporting earnings, the spread is increasing of those raising earnings forecasts versus those companies lowering their outlook.
Market analysts that we talk to have been quietly expecting a blow-off type market decline to force the emotional short term investors to the sidelines to set up a severely oversold market that would provide a nice entry point for us long term investors. The past few trading sessions may be just what is needed to set up the next leg of this long term bull market.
We recently came across a letter that a president of a major asset management firm wrote to his children about how to manage their portfolio. In part, it read:
Personal portfolio management is not a competitive sport. It is, instead, an important individualized effort to achieve some predetermined financial goal by balancing one’s risk tolerance level with the desire to enhance capital wealth. Good investment management practices are complex and time consuming, requiring discipline, patience, and consistency of application. Too many investors fail to follow some simple, time tested tenants that improve the odds of achieving success and, at the same time, reduce the anxiety naturally associated with an uncertain undertaking.
Very fitting advice.
Whether the current decline continues a bit more, or marks a bottom for this cycle, is uncertain. What we do know is that companies have come down to prices that historically are at a good value, and that means long term investors will be buying as the short term speculators are selling.
Enjoy your week!
Lesjak Planning Corporation Team