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So far this year in the U.S. stock market we have seen one of the worst starts ever. In my opinion, starting the year negative causes more anxiety than if this occurred in, let’s say, June. Here’s are a few thoughts on the current market situation:
1. China is not the United States. While globalization means that we are all very much connected, a slowdown in China is not a frontrunner to a recession in the United States. The 1997 Asian Crisis (a somewhat similar situation), though temporarily disrupting U.S. stocks, did not bring down the U.S. economy with it.
2. A drop in the stock market is a very normal thing. However, the market has been pretty tame in the past few years, so investors have gotten spoiled. The chart below illustrates calendar-year returns of the S&P 500 (grey bars) with the red dots showing that year’s largest market drop.
3. Fear-based investing does not work. There is always something in the news that causes uncertainty. Just think of the past several years: BP oil spill, a double-dip European recession, Greece, U.S. credit rating downgrade, the fiscal cliff, Greece, an interest rate hike, Ebola, oil glut, Greece, soaring U.S. dollar, and now China. While the stock market does not react well to uncertainty, it also reacts to fundamentals—things like earnings, balance sheets, and economic expansion.
1. The U.S. consumer is setup well. Low unemployment, rising wages, low inflation (think of the price of gasoline), and a strong dollar bodes well for American consumer spending.
2. Europe is expanding. Think of Europe as being a few years behind the U.S. While we are finished with quantitative easing, the European Central Bank is still using it as a tool to stimulate their economies. However, we’ll see what effect China has on the continent.
3. Interest rates are still low. It doesn’t seem like the Federal Reserve will drastically increase rates. With how 2016 has started, they even might rethink their strategy of increasing rates throughout this year.
1. China, obviously. Long-term, China is transitioning to a consumer-driven economy (think of the United States last century). There is so much to this story, and so much that we don’t know due to China’s centrally-managed economy. While it could level off, the fact is we may see a lot more disruption before it gets better.
2. Energy producers. While low oil prices have a lot of positives, energy companies and energy-exporting countries have been hit hard. This is one reason for a slowdown in global growth.
The important thing to remember is that investing is a long-term commitment. Don’t think of where the stock market is today, think of where the market will be in 10 years (sorry, I cannot guarantee future results). We may finish 2016 lower than where we started, or we may see a healthy comeback. For long-term investors, market drops present great buying opportunities, both for yourself and for the people who manage your mutual funds.