Despite a consistent slide in the market since the turn of the year, a local advisor says it is no cause for concern.
According to local Edward Jones Financial Advisor Thomas Davis, the leading U.S. economic indicators continue to be positive, including the much-anticipated rise in interest rates, which shows the Federal Reserve’s confidence in the long-term health of our economy.
On Monday, the Dow Jones and the Standard & Poor 500 were down over eight percent, as they have been for a few days, but Davis said it is primarily fear-driven. Once that number increases to 10 percent, it is called a market correction. At 20 percent over an extended period, it is called a recession.
Davis pointed out that a 10 percent correction happened about the same time last year, but the economy recovered so quickly that it was hardly noticed.
While 400-500 point changes in a day are not overly common, Davis said, they are not uncommon and primarily signal investors’ and the market’s response to short-term events.
“In fact, the last 500+ point down day was August 24 of last year with a 588 point drop closing at 15,871,” Davis explained. “This came right on the heels of a spree of all-time highs ending on May 19 at 18,312 and then returning to 17,910 on November 3. However, looking at the bigger picture, the market began the year at 17,832.99 and closed the year at 17,423 representing less than 1 percent decline after 5 years of double-digit positive return. So, after a 12 percent correction, and all of the anxiety that came with it, 2015, turned out to be mostly flat.”
Davis said that in light of this, it is more of a buying opportunity than a reason for concern.
“Investors should not panic and make snap decisions, but should take this downturn as an opportunity to have meaningful discussions with their advisor about any changes in their goals, risk tolerance, and even rebalancing their portfolios to more appropriate diversification and allocations, if necessary,” said Davis.
Referencing a study on the 2008 recession, Davis said that fear had a negative affect almost three times that of the economic factors at play.
In fact, noting positive economic indicators, Davis said the last six years on the stock market have been the best in history when considering return on investments, and one of the best employment reports in the 21st century came out last week.
“The decline is based mostly on the Chinese market and falling oil prices, but there are a lot of positive indicators,” said Davis.
Oil prices are down to under $30 per barrel from almost $50 per barrel, about $15 less than the value this time last year. The Organization of the Petroleum Exporting Countries (OPEC) attributed this in December to oversupply and forecasted an increase in world oil demand by 1.25 million barrels per day in 2016.
Another factor affecting global economics is instability in the Chinese economy, which has been attributed by some economists to disappointing manufacturing data and uncertainty on the stock market.
Davis said the real concern with China is the devaluation of the country’s currency, the yuan.
“American economists believe China is attempting to devalue its currency to manipulate the value of exports,” Davis said.
Davis insisted that though these market influences may be disconcerting to some, they are not extremely out of the ordinary, and should not incite panic in investors.
“Before you make decisions, discuss your options with a professional. Ask questions, get answers, then make decisions based on your long-term goals and not short-term fluctuations,” said Davis.
Financial markets are instantly and always connected, explained Edward Jones Principal Investment Strategist Kate Warne, but they do not always move together.
“Because the U.S. is such a large economy, it is less exposed than most other countries to slower growth in the rest of the world,” Warne continued.
For this reason, the US economy depends to a much greater extent on consumer spending, she said, citing December’s gain of 292,000 jobs.
“Economic growth is bumpy, though, so don’t overreact when it fluctuates,” said Warne. “Lower oil prices have historically helped boost economic growth and corporate profits. In addition, slower global growth and lower oil prices are likely to continue keeping U.S. inflation low and may prompt the Federal Reserve to delay future hikes in short-term interest rates. Although we didn’t (and don’t) expect dramatically higher interest rates in 2016, rates could remain lower for longer, supporting vehicle purchases and keeping mortgage rates low. “