Instead of starting out 2016 with beautiful financial fireworks, worldwide stock markets have begun the year with the equivalent of a Fourth of July firework dud which fizzles downward with a loud hissing sound of disappointment.
So what has occurred this week?
The primary cause of the stock market declines throughout the world this week was the continued contraction of the Chinese economy. Chinese manufacturing has been declining for 10 months, as opposed to previous years of rapid growth. The tracking index dropped from 48.6 to 48.2, where a number below 50 indicates a contracting economy. However, the December monthly decline in this index was less than 1%. Is the perception and reaction more than the real economic data?
The other major news of the week is the continued drop in oil and wholesale gasoline prices. Weakening Chinese demand for commodities and new data released on Wednesday showed US supplies of gasoline inventory increased unexpectedly, causing further concerns by financial traders. Retail gas prices at the pump are expected to decline further in the next week.
While dropping oil and gas prices are good for many companies and consumers, there are growing concerns about further job and exploration cutbacks by oil companies, as well as fears about whether smaller oil companies can survive at these much lower oil prices.
What do we think and what should you do?
Despite the significant Chinese stock market decline, which is greater than 10% in the first few days of 2016, US and broader global indexes are down much less than this amount through Thursday. At this point, the US S & P 500, defined below, is down around 5.0% for the first four trading days of 2016.
We recognize that the unexpected can and will occur. Unfortunately, these quick stock market moves are a reality. Volatility always has been, and will continue to be part of stock market investing in the future.
No one was predicting this decline just a week ago, before New Years Day. Just as we saw last August and in succeeding months, market declines can be recouped over a period of days or months.
We do not think you, our clients and friends, should panic and get out of the market. It is too hard to time the market correctly twice, to be able to get out and then try to perfectly time when to get back in the market before it rises again.
Remember, declines in the stock market are temporary, unless you sell and make it permanent. The volatility is ongoing, but its impact can be temporary.
The long term trend of global stock markets is clearly upward, particularly the longer you view it.While we recommend investing in a globally diversified portfolio, the following should help give you clarity and confidence to have a long term perspective in investing in the stock market.
These are the closing values in the S & P 500, an index of 500 large US based companies. Note that the companies within the index change over time.December 31, 1975: 90.19
December 31, 1985: 211.28
December 31, 1995: 615.93
December 31, 2005: 1,248.29
December 31, 2015: 2,043.94
For many investors, you should view declines as buying opportunities.
If you are young or are able to make IRA or defined benefit (for self employed individuals, like consultants) retirement contributions, make them now, not later in the year.
If you are older or retired, you should have an adequate financial foundation of investments like bonds and CDs, which you can rely on to deal with down financial markets. We work with our clients so they have many years of this type of financial security. If you have a strong foundation of safe fixed income investments, the volatility of the stock market should not impact your security or standard of living.
We hope this helps provide you with information and perspective. If you would like to discuss these recent events and how they impact your personal financial situation, please call us. This is an important way that we can be valuable to you.