Posted On: 8/25/2015 10:57 AM
Well, the short answer is that you don’t. Market corrections are triggered by an event or events that make investors uncertain about the future. At the moment there are several factors that have unnerved investors.
The China Stock Market & Economic Slowdown is a Red Flag for Investors
China is the only economy in the world growing at 5 to 6 percent annually. However, the Chinese economy is slowing and since China has been the engine of growth for the rest of the world, the U.S. is concerned about our companies that export to China. The devaluation of the Yuan stimulates China’s exports making them cheaper for the Chinese consumer who will pay less for goods and services produced in China, but imports will be more expensive for those same consumers. On the other hand, U.S. consumers will pay more for imported goods from China since the U.S. does an enormous amount of trade with them. Potentially, multinational U.S. companies such as Boeing, Apple and Caterpillar, could have reduced profits because they will sell less to China. The Chinese stock market has also been plagued by extreme volatility, which is spilling over to other world markets. World markets are interconnected and react similar to problems in China.
The Chinese government took action last night to regulate interest rates in an effort to stabilize their market and stimulate the economy.
The Federal Reserve’s Timeline for a Rate Hike Keeps Changing.
For months now, the Federal Reserve has indicated that it is going to raise interest rates. June was the first deadline, but nothing happened. The Fed is now targeting September. After this market correction, a new debate has begun as to whether it will even be this year. This uncertainty has been weighing on investors for months. A rise in interest rates is a signal to investors that the accommodation period is over. An analogy would be to drive your car on a straight, smooth road and suddenly a curve appears. As a driver, you have to adjust to the curve. When the Federal Reserve raises interest rates, investors have to rethink their investment strategy.
Anemic Economic Growth in the U.S is a Signal to Investors that a Recession May be Looming.
There has been a continuous debate as to whether the U.S. economy is growing or slowing, again the uncertainty that investors don’t like. The average of GDP (Gross Domestic Product) for the U.S. is approximately 2% in 2015. What is GDP? It is the sum of all the goods and services sold in the U.S. to consumers and businesses. Just to put our economy in prospective, GDP in China is more than double ours. As long as the growth in the U.S. is still positive, a recession can be avoided. But investors are concerned that if the Federal Reserve raised interest rates, the U.S. could have negative growth. With oil prices down, the consumer is beginning to spend more and housing is still coming out of its dramatic downturn. Any interest rate hike that would affect consumers would contribute to a slow economy.
Should I Invest in the Stock Market or China Stock Market if the Correction Hasn’t Bottomed?
Well, I started this blog sharing with you that no one really knows when a stock market correction is over. The definition of a correction is a 10 percent decline from a market peak. At this point all of the indexes are in correction mode. While it is scary to see a market down over 1000 points in the morning, look at the percentage of decline. This is the real measure of a correction; the percentage of the market decline, not the points.
Some investors are concerned that this correction may be similar to the one in 2008. However, it is important to remember that all stock market corrections are not triggered by the same events. The 2008 stock market wasn’t a correction; it was a bear market since it declined more than 20%. The bankruptcy of Bear Sterns and Lehman Brothers brought the financial markets into a free fall. As of now, we haven’t seen any evidence that the banking system is in trouble. In fact, it is in much better shape than it was in 2008.
I have been through many corrections and bear markets in my 35 year career, beginning with the 1987 crash, and no doubt I will see more of both. I think this is a correction and the key to investing is patience and diversification. Once a correction begins, there is a great deal of volatility before a bottom is reached, which may be a little scary, but be a disciplined investor.
For personalized financial guidance about investing during market corrections and in light of recent China stock market events, let’s talk.
Please enjoy the rest of your summer.