Monday August 24, 2015 was an historic day for the U.S. Stock Market. Shortly after the 9:30 am start of trading the Dow Jones Industrial Average (The Dow) had dropped more than 1,000 points, which has never happened before. The drop represented a loss of 6 ½% (give or take) of the market value, which represents who knows how many billions of investment dollars.
Turn on the talking heads and you will hear all the “reasons” this happened, which can be summarized as China and the likely increase in short-term interest rates before year end. Dig a little deeper and you may hear a story about currencies or slowing global growth. And at some point someone had to mention corporate earnings. Point is, the talking heads always have a quick-and-easy story for what just happened.
What they don’t tell you is that things are much more complex than a simple little story. Everything mentioned in the preceding paragraph is a part of the problem. Global growth has been slowing, interest rates have to go up at some point, currencies are an issue, and China is a hot mess. But to make the argument that it all just came around today is simply … a good story to sell some advertising.
Just as currencies have been an issue for some time, global growth has been lagging for years. This can be seen in U.S. GDP, but even more so in the emerging economies. Since 2011 emerging economies have suffered due to a lag in manufacturing demand and a slowdown in global trade. The massive decline in commodity prices over the past year has made the situation worse, as these countries tend to be much more dependent on commodities than the developed nations.
Earnings, for more than a few quarters, have been a concern for two reasons. Profit margins for more than a few years have been historically wide. While a boon for earnings, it is a trend which cannot be sustained. At some point, a company has to hire more employees to do the work or pay those you have a higher wage (see Walmart and McDonalds as two examples). For the materials and energy sectors, earnings have been crushed due to the fall in the price of oil and other natural resources. With oil around $40 per barrel and copper trading well below $2.50, earnings will not be turning around for these companies in the near future.
The correction for U.S. stocks that “everyone” has been predicting for years has finally arrived. You can choose to view it as a negative, but we prefer to see moments like this for what they are – a vital part of the market cycle. Once you get past the denial of what is happening, times like these never feel good. But if you can get past that sour feeling in the pit of your stomach you can see how times like these are opportunities, not misfortunes. With lower prices comes value. With value comes investment opportunity.
Looking ahead we expect to see more volatility as global stock and bond markets adjust to the new perceived reality. We doubt this is completely over. There will be ups and downs in price as the market works through the financial and emotional adjustment that comes with lower stock prices.
Market corrections end not on massive selling but on heavy buying. August 25th was a day of massive selling. Rarely if ever do we see corrections end with an event. Instead, it is a process which takes time. Use this time to assess your situation, and your investment, to make sure you are properly allocated and ready for the next bull market.
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Robert I Cahill, Managing Partner Rob.Cahill@wfafinet.com
Jeffrey T. Bogert, Partner Jeff.Bogert@wfafinet.com
Jonathan D. Soden, Partner Jon.Soden@wfafinet.com
Robert Sweeney, Financial Advisor Bob.Sweeney@wfafinet.com
Jay Knight, Associate Financial Advisor Jay.Knight@wfafinet.com