Chinese Market Prompts Stock Correction
As you read this email, we’ve been experiencing something that hasn’t occurred on Wall Street since 2011 – a stock market correction.
Corrections are unsettling, yes – and they are also part of any ordinary bull market. Historically, they have occurred about every 18 months. This current bull is extraordinary – the S&P 500 has sailed along without a correction since October 2011 – the third longest interval without a correction in the past 50 years. That 2011 correction took three months to occur, so it was not nearly as dramatic as what we seem to be witnessing now.1
Thinking in the long-term.
A correction is short-term, and your investing is long-term. The same goes for a bear market. Patience is part of investing, and when you have the patience to ride out turbulence and market shocks and stay invested, you position yourself to deal with any development.
What is driving stocks downward so violently? You can cite three things.
Global investors are starting to believe China isn’t fully admitting the trouble within its economy. Officially, China has maintained that its economy is growing about 7%. That is slow growth for China, but still the kind of economic expansion that its business sector and global investors have relied on for years. A key flash factory PMI for China came in at 47.1 for August – a reading deep into contraction territory, down from 47.8 for July. China’s economy relies heavily on its manufacturing engine, and this signal hinted to many investors that the Chinese economy is currently growing far less than the official forecasts project.2,3
Oil prices are still descending, partly on the assumption that China will demand less of the commodity. Light sweet crude even went under the $40 mark Friday for a moment; it may close under $40 this week for all investors know.3
Wall Street still assumes that the Federal Reserve could raise interest rates next month. The latest Fed policy meeting minutes did note some conflicting views, but even the latest (tame) consumer price index and factory output readings may not dissuade the Fed from its intent to start tightening.
The point is that these are short-term issues. They may not preoccupy investors next quarter, next month, or even next week for all we know. (Remember the Greek debt crisis?) “This volatility is likely to remain with us, at least until the end of the year,” deVere Group CEO Nigel Green told TheStreet, noting that “for most long-term investors, fears of a near-term financial apocalypse are overdone.”3
Headlines come and headlines go; the market has amazing rallies and harsh selloffs. Think of them as the “weather” of Wall Street. Stay patient through these headwinds, and remember that when it comes to equity investing, the sunny days have tended to outnumber the bleak ones.
Tom Cymer , CFA, CFP®, CRPC®
1 - cnbc.com/2015/08/21/the-associated-press-qa-what-a-stock-market-correction-means-to-you.html [8/21/15]
2 - money.cnn.com/2015/08/21/investing/stocks-market-lookahead-august-21/index.html [8/21/15]
3 - thestreet.com/story/13263507/1/stocks-end-brutal-week-as-market-nears-correction.html [8/21/15]
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