Remain Calm

By Brian Dolan, Head Market Strategist Keep an Investing Perspective

Global markets are showing heightened volatility and if you listen to the talking heads, you would think the end of the world is at hand. The numbers are indeed alarming. But if you stop and ask yourself what has changed in the last few days or weeks, the real answer is ‘nothing.’

China is pointed to as the most likely culprit behind the recent sell-off. But China’s stocks began their collapse in mid-June, over two months ago. At the time, other major global stock markets essentially ignored what was happening in Shanghai and Shenzhen and traded sideways and even went on to make new highs in some cases. And rightly so. It was a Chinese bubble that was bursting and there was no reason other major markets should be affected.

And then the Chinese loosened the reins on its currency, allowing the yuan to weaken by about 4% against the US dollar (USD), triggering a wave of competitive devaluations among emerging market currencies. The Kazakhstan tenge plunged by over 36% when the government abandoned its peg to the greenback. That’s right, Kazakhstan. When was the last time you thought about Kazakhstan? (No offense intended to Kazakhstan.)

And that’s the point. The current market melee is a classic example of market psychology and positioning. Complacent investments being disrupted by price movements, forcing liquidations and wholesale selling, aggravated by algorithmic trading systems that sell because the market is going down. The timing could not be better. Late August. Everyone at the beach, not wanting to do much of anything. Prices start falling, machines start selling, prices fall more, and the ‘bots sell still more.

Current Markets in Context

Emerging markets have borne the brunt of the sell-off: the MSCI Emerging Market Index is down about 24% since the highs seen at the end of April. And that is as it should be. Emerging markets are notoriously illiquid, prone to hot money juicing prices higher, only to collapse when the mood shifts.

Major developed markets have been caught up in the whirlwind, and that, too, is to be expected. Market psychology and algorithms, again. In the US, for example, the S&P 500 has historically had a 10% correction every 20 months on average. (Those corrections last for about three months on average.) I look at the current declines in major developed markets as an excellent opportunity to put cash to work and take advantage of discounted prices. The chart below illustrates the historical performance of the S&P during periods of corrections from recent highs.

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Source: DriveWealth; The Reformed Broker


As I have argued throughout this year, the global economic outlook remains extremely fragile.  Major market indexes had been defying that outlook with steady and seemingly resilient gains. I viewed the markets as a glass ‘half empty,’ looking for better price levels to enter into long-term investing positions. Recent market declines have turned that glass around, and now I see the glass as ‘half full,’ at least in terms of market price levels. Always remember, financial markets are poor predictors of underlying economic performance. Or as the noted economist, Paul Samuelson, once observed, ‘the market has predicted nine of the last five recessions.’

Global growth concerns have erupted in a rather sudden manner, even though the writing has been on the wall for many months.

But as I asked earlier, what has really changed in the last few days or weeks? Nothing except the price level of the major stock indices. Economic fundamentals in the major developed continue to point to steady, if sub-par, growth overall, which markets will eventually recognize once the panic subsides.

Additionally, given the global turmoil and uncertainty that has roiled markets, the US Federal Reserve is now more likely to refrain from making any changes to US interest rates at the Sept. 17 meeting, in keeping with my long held view that the Fed will take no action this year. A steady Fed should be supportive of risk sentiment and stocks in general.

Where to Invest?

Recent weeks have revealed what should be seen as a market truism: If it sounds too good to be true, it probably is. Chinese stocks rallying 50-70% between February and June, 2015, even as incoming economic data continued to point to a slowdown? The implosion of emerging markets overall should serve as a reminder to investors that the investing world is still very risky.

Long-term investors need to focus on the stability and security that underlie their investments. At DriveWealth, we continue to believe that the US will be the primary beneficiary of that investing trend. Investors in US-listed securities, whether it’s an ETF or an individual stock, have access to investment opportunities all around the world. Most importantly, they enjoy the benefit of a highly regulated and stable investment regime unmatched anywhere else.

Deciding when to invest should be based on market and price level considerations. Deciding where to invest should be based on the security and reliability of the regulatory framework where you hold your investment account. I view the current pullback as an opportunity to add to longer-term investments at more advantageous price levels.



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