Recently, while Tom and I were on vacation with our family in Toronto, visiting our middle daughter, Annie, we spent lots of time outside. That made me decide I need to get outdoors more and, as a result, I’ve been enjoying our Minnesota weather despite some mugginess and heat. Like many of us in the “hinterlands,” as I enjoy our still green landscape, I hear the footsteps of winter.
Today, August 21, 2015, the Dow Jones Industrial Average (Dow) which is made up of the 30 largest stocks in the U.S., fell 530 points or -3%. The bigger story is that it has dropped to just below 16,500 from its all-time high of about 18,300 in May of this year, a total decline of -10%. The media will cite many reasons for this: actions in China, slowing global economic growth, the possibility of the U.S. Federal Reserve Board (FED) raising interest rates, etc. All of these reasons have played a part in the decrease. As we experience this investment decline, the science of Behavioral Finance says that we as humans may hark back to the painful 2008-2009 decline, causing us to hear those “footsteps.” While caution is natural (and prudent), it is wise to put this current market in perspective. A -10% decrease is not pleasant. In investment terms, we label such a decline as a “correction.” Our last U.S. stock market correction came quite a long time ago, in 2011, when the Dow fell -15% before reversing its course and turning positive. Stock market history is filled with corrections that follow the type of upswing (and overvaluation) we’ve experienced in the last six years in the U.S. stock market.
While we are experiencing a stock market correction, our outlook here at Laurel Wealth Planning is that we are not entering a bear market, though we can be surprised. It is true that global growth may be slowing somewhat because China’s growth is slowing from 7% to about 5% per year, and that the FED has telegraphed that it will likely cautiously raise interest. At the same time, the U.S. and global economy is experiencing some positives. U.S. unemployment is down to about half of what it was at its peak of 10.5% in 2009. Room exists for wages to grow, which can create the positive cycle of more consumer spending, leading to a healthier economy, leading to potential growth in key investment markets. At the same time, consumers here and abroad are also benefitting from lower fuel prices (remember gas prices of a year ago?). Lower fuel prices can also create a positive cycle as consumers and industry can spend on items other than fuel, again, potentially leading to healthier economies and potential investment gains. (The exception to this will be energy-related industries which will struggle with these lower prices, as will nations heavily reliant on energy exports such as Russia, Venezuela, etc.)
Jeff Saut, Raymond James Investment Strategist, prognosticates that we may be in the sixthyear of a ten to twelve-year bull market. Our outlook at Laurel Wealth Planning is that we have been expecting a stock market correction for some time and we believe that further growth is likely after that. That said, as you know, while our work on your behalf is customized to your situation, we recommend portfolios that are structured for diversification, i.e., a “foot in many camps.” Diversification can add “cushion” when prices are volatile.
Please let us know if you’d like information on the performance of your portfolio during the last months. As you would expect, we are monitoring your investments closely. We always appreciate hearing from you.