If you check out the news headlines regularly (not recommended!), it can be unsettling to hear about the worldwide stock market swings of the last three weeks. Stock market declines were in the news again today after new reports of an economic slowdown in China.
Here are a couple of things to think about as you assess the news:
- We continue to believe this is a normal and necessary stock market correction. Stocks in China soared by over 100% in the past year on excessive and unjustified optimism. Stocks in the United States have been on a steady and nearly uninterrupted uptrend for almost four years. Declines such as the one we are experiencing now—almost always led by professional investors, not by individuals—are necessary readjustments to economic reality.
- Once corrections like this are over, markets often regain their upward momentum and recover all declines and more, heading to new highs.
- We wouldn’t be surprised if this correction forces markets down by 20% from their recent highs. As of the most recent market bottom last week we had only had about a 10% correction.
- You can safely ignore this correction. As long as you have a balanced portfolio, and a safe area from which to withdraw money, you don’t need to sell in a panic like the professionals do. They are intent on justifying their day-to-day existence; you are focused on achieving long-term financial goals.
- We do not believe this is a systemic major bear market like the one we experienced in 2008. This is not a credit crisis, banks are not failing, major financial institutions are not going under, and the world is not on the verge of financial collapse. This is a short-term reassessment of economic growth prospects.
- Good news may come out of this: it is possible this decline will cause the Federal Reserve to delay an interest rate increase in September. Or, if it does increase rates, it could also announce that the next increase is going to be delayed. Either move could be seen as positive by the stock market. Even an increase might be viewed positively because market participants may be relieved of having to live with the uncertainty of not knowing when rates will increase.
Finally, remember what famed and highly successful investor Peter Lynch, former manager of the Fidelity Magellan Fund, once said: “More money has been lost worrying about a crash than has ever been lost in a crash.”