Last Friday saw massive drops in world markets, and stocks continued to plummet Monday, including a brief 1,000 drop in the Dow. Though the declines eased significantly as the morning went on, the market plunge sent a shiver of fear through Americans with retirement accounts or those saving to buy a home that the bull market is over.
So, should investors be concerned?
“Certainly, investors are nervous,” said Curt Alexander, local Edward Jones financial advisor.
“Am I worried? Quite frankly, I’m relieved. Normally, we see a 10 percent drop in the market once a year, but we have not had a correction since 2011. So, I think this is refreshing for the market,” Alexander explained.
He said he had a substantial number of customers who had called or come by his office Monday, and many had made investments. “You want to buy stocks when they are on sale. Just like at Wal-Mart or any other retail store, you buy when things are on sale. While the market was down early this morning, it had largely recovered by noon, which is a good thing,” Alexander said Monday afternoon.
He explained that a “market correction” is a decline or downward movement of a stock, or a bond, or a commodity. The amount of the decline is at least 10 percent. “In short, corrections are price declines that stop an upward trend. You have to remember that stocks, bond, commodities and everything else traded on the markets never stay the same. They either move up or down, and at some point their value will change – for better or worse,” Alexander explained.
Market analysts blame the market drop on a slowdown in China’s economy, but there were plenty of other worrisome developments weighing on the market. However, Alexander said investors should not panic, not yet anyway.
“You never want to make long-term investment decisions on short term reactions in markets. And, what is happening now in the market is not that big when you put it in perspective,” Alexander said.
About China, Alexander, who also serves as mayor of Elizabethton explained that what happens in China matters, just because it is the world’s second biggest economy. “However, I don’t think China in the long-term is a problem. It is really unique in that China during the first six months of this year had an economy that grew by seven percent. I think any country or business would be happy to have that kind of growth,” he reasoned.
Although the steep drop in the price of oil in the last month has become a major concern for traders, Alexander said, “I never though I’d see the price of oil at $40 a barrel again. This is the lowest it has been in six years. This is good news for the consumer. It means lower gasoline prices for the consumer, and money that drivers are saving at the gas pump should mean more spending by them at stores – and a faster growing U.S. economy. Also, the plunge in oil prices will cause the demand to go up.”
Alexander reasoned that the U.S. economy has three good things going for it: Low inflation, low employment, and good corporate earnings. “All of these are present in the market, and our economy is a lot more solid than it was in 2008 when we had the financial crisis,” he said.
He agreed that there is an impulse to do something when the stock market falls hard for a few days in a row. “But that’s just the thing. Stocks are useful for long-term goals. If I were a young person and had a 401(k) I would put as much as I could in the market. It doesn’t make sense to change your investment strategy based on this short term reaction in the market,” Alexander said.
However, he advised that if you are nearing retirement, you might consider when the market rebounds shifting toward a more conservative approach.
“Chances are your 401(k) is a diverse mix of investments. Many people save in target-date mutual funds that do the work of diversification for them. At some time in the past, you made a decision to construct your portfolio a certain way. You knew that stocks involved risks and that the returns they have traditionally delivered, above and beyond what cash and bonds do, was the reward for your staying in the market.
“Nothing about the events of Friday or today suggests that the fundamentals of the market have changed. Remember, you are in for the long-term not the short-term. What happened Friday and Monday is what markets do. There is absolutely nothing abnormal about what is going on here,” said Alexander.