I am not necessarily surprised by the volatility in the stock market since the beginning of the year. Clearly since it is quite one- sided i.e., that being down, it is even a little disconcerting for an investor trying to maintain a longer view of stock ownership.
As usual it would be a rather extensive list of factors that may be of concern to the market – some of which may be valid and others just noise. Some examples are:
- China’s slowing Economy – This has been an on-going concern as they shift from a primarily export oriented economy to one with more focus on domestic consumption. Nonetheless, it is still the second largest economy in the World, and it’s still growing at an envious pace. +/-5% is not as good as +/-7%, but compared to the US at +/- 2% it is quite robust.
- Chinese stock market – I know some people liken the US stock market to gambling, but the Chinese stock market might really be more like a casino due to its relative newness, regulations, controls, and government interventions.
- Oil at $30/barrel – In spite of all of the pluses for consumers from the decline of $100 per barrel in crude oil, it has resulted in some serious disruptions in the energy industry. Which have now moved out into other sectors. Obviously, it can’t decline another $100, so the real question is, has there been a fundamental change in the World’s demand for oil? That answer is probably yes, but does it justify this price or will there be at least some recovery.
- The end of the Fed’s Zero Interest Rate Policy – There is an element of adjustment needed by the market as interest rates move away from zero. Short term money market rates have started to generate at least some income. But, what happens to longer term interest rates? So far the 10 year US Treasury yield is down. How often will the Fed act? How much will the Fed push rates up? Will the yield curve simply move up or flatten out with most of the increase coming at the short end of the curve? I think the latter is more likely.
- Global unrest – This is also an on-going story. Is something really different? Well the players might be different. But, a lot of it still seems to be focused in Middle East. What impact will the decline in oil prices have on this? How about the US starting to export oil for the first time in a very long time? These are all uncertainties and disruptive for the Middle East, but how detrimental to US security and its economy? Seems like, in time, less imported oil would be a good thing for both.
- Speculators / Computer Trading – Is there any chance that these swings are at least caused in part by them? Certainly the momentum would suggest more declines.
So what impact does this all have on long term investors?
Is this an OPPORTUNITY or a DISTRACTION?
Clearly we are not a lows like we saw in early 2009, which in hindsight was the buying opportunity of the decade. On the other hand, we are not so high that values are ridiculously high like they were before the dot com bubble burst.
So what to do? My typical answer is probably nothing. If you have ready funds, maybe adding to equities would be reasonable if it fits within your overall asset target. Adding toyour fixed income portfolio will probably work out – unless the Fed action become quite aggressive, which I don’t think will be the case. Bottom line, moving out of equities to a money market is not likely to be the right move!