The recent summer selloff was steep and swift with the Dow Jones dropping 1,000 points in one week. Weakness in the summer has happened in 4 of the last 5 years but we have always bounced back. Will this be the same? I don't know and neither does anyone else. So, it is always important to keep things in perspective and provide context for the recent drop in stocks.
- October 2011: Last time the Dow Jones or S&P 500 fell 10% or more from its recent high. The Dow Jones is down 10.1% from its high and the S&P 500 is off 7.6% from its high.
- This is the first 3% drop in 4 years. There were 46 similar drops in the 4 years prior to 2011.
- Market corrections have happened every 18 to 20 months on average.
- The bull market has now lasted almost 6 1/2 years, starting in March 2009.
- The S&P 500 (SPY) is up 187% on a price basis from the low in March 2009.
- U.S. Small Cap Stocks (VB) are up 282% on a price basis from the low in March 2009.
That being said, what caused this recent volatility? For the most part it is slowing economic growth in China and how that may affect the rest of the world. Commodities, produced by many emerging market countries, are spiraling down in price. Those same countries are also devaluing their currency trying to keep their export prices competitive.
Historical parallels exist between now and the Asian Financial Meltdown of 1997. Back then, Asia's largest economy (Japan) was slowing, countries were devaluing their currencies, and the U.S. FED started raising rates. The one thing different between now and then is that the FED hasn't started to raise rates yet. Current economic data suggests that the FED will try to support growth and not raise interest rates.
China's economy was growing at 11% in 2010, then 9.5% in 2011, 8% in 2012 and was just above 7% in 2014. While the growth is great compared to what we are experiencing in the U.S. the downward trend in China is more important than the return. Also important is how the communist Chinese government is manipulating their markets including stocks, currency and economic numbers. Investors need transparency in order to accurately measure the risks and invest with confidence. Over the past few years I have been avoiding emerging markets and plan to keep doing so.
What is going on here in the U.S.? Things are not great but they aren't terrible either.
- Housing starts are up to their highest since 2007.
- U.S. jobless claims are at historically low levels.
- U.S. unemployment has been moving down for almost 6 years
- U.S. GDP grew at 2.3% in Q2. That is the 5th consecutive positive quarter and the 11th out of 12 that was positive.
Yes, it is stressful for anyone to see 500 point drops and how it has affected our net worth. But that is short term. Have your goals changed? Did you feel uncomfortable or lose sleep because of the drop? If so, consider changing your asset allocation but also understand how that may impact your long-term goals.
It is always helpful to look at weakness as an opportunity to buy more stocks or rebalance while prices are on sale. Long-term wealth can be created during times of fear and falling prices.