The world of investing hasn’t been much fun since May/June of 2015. Last year, the stock market experienced its first real correction in over 4 years, and while it was painful, it began to bounce, which led most of us in the financial sector to believe it was over and done…at least for a little while. Unfortunately, it seems that Mr. Market isn’t done with the excitement, as it appears that we’ve slipped right back into another correction that’s nearly identical to the one we faced last year.
If you tune into the financial media shows, first I must say, “Stop it.” The hyperbole being used to describe stock market movements is designed to do nothing more than scare people and keep them tuned in for more doom and gloom. More viewers = more advertising revenue, which is the business of ALL media today. So, I’ll try to address a few of the main talking points being pushed out as the narrative for why the stock market may be misbehaving.
Let’s start with China. For months we have heard continuous discussion about the Chinese and the downward spiral of the Chinese economy. One of the side effects of the continual discussion about China is that it leads some people to overestimate the dependence of the US on China. Can you name any major industry that has suffered in the US due to China’s economic slowdown? I can’t either because less than 1% of our exports actually go to China. In fact, a strong dollar may actually help imports from China become cheaper, which can help many of the industries that rely on Chinese manufacturing. China is still an important player in the global economy, but they are also still a Communist country that is run by a top-down, state controlled economic system. As long as they maintain this form of government, much of their economic strength will be subject to question because of the manipulative role their government has in their commerce.
Right now, the Chinese government is trying to orchestrate a transformation from an industrial / emerging economy into a service driven one; and one byproduct of this change is an economic slowdown, which is natural. Also, China has been dealing with the effects of casino-like behavior from its own citizens who were literally buying into China’s stock market on margin. What that means is that they were borrowing money in order to invest in the economic expansion (or were they unknowingly financing it?). This artificial demand created a run-up in the Chinese stock market, and in turn, a cascading effect when their stock market turned downward, as people ended up getting margin calls. Panic is real, even in China.
Oil. I won’t spend too much time here because most people I talk to cannot explain what the real issue is with oil. The truth is that oil has a SUPPLY problem, not a demand problem. This goes back for some time, as the Saudis and other OPEC nations have consistently refused to cut down on their oil production, largely in response to the “Drill Baby, Drill” movement we had here in the US. Moreover, US oil companies have discovered Shale, and the domestic industries have been booming until all of this nonsense started. The international competition for the oil market has decided to flood the market with supply and drive the price downward, hoping to drive competitors out of business…so far, nobody has blinked.
The result—oil is now hovering around $30 a barrel, and my car is super cheap to fill up at the pump. This is not a bad thing, and I would consider it the same as an income subsidy or tax cut. Working class Americans should be the greatest beneficiary of this season of low oil. So, remember when oil prices rise-and everyone says that rising oil is a disaster-they can’t possibly be right. Rising oil and falling oil can’t both be horrible for the stock market, but they do make good tv.
*A brief corollary on the oil oversupply problem— this is my own speculation, but I would watch the Middle East. Much of the concentrated wealth from that region comes from oil, and by keeping supply constant, they are also hurting themselves by the lower prices. Saudi Arabia has already supposedly cut diplomatic ties with Iran. ISIS is creating chaos and goading the US to war. We could see tensions begin to flare up as those Middle East economies feel the pinch. Look for war drums to pound, as military conflict would undoubtedly create instant increase in oil prices. Follow the money.
The Federal Reserve. I don’t know about you, but I’m sick to death of hearing about the Fed. If we have a significant problem with our stock market here in our country, here is where I would place the blame. In the wake of 2008-2009, the Federal Reserve began an unprecedented amount of Quantitative Easing—they were pumping funds into the markets by buying treasuries. The QE programs allowed banks to deleverage themselves, and in turn, banks were able to rebuild their reserves. Part of the rationale behind the QE programs would be for banks to lend those funds (how banks make money), but the banks decided to hold the reserves or use them to help finance mergers and acquisitions, which became possible because of the low cost of debt. This is one reason why you’ve read about companies merging with other companies or banks buying other banks, but you haven’t seen an explosion of new startup businesses in your local neighborhood.
Unfortunately, all good things must come to an end, and that means the reliance on cheap debt needs to be broken. The Fed did finally decide to raise rates in December— by a whopping .25%. I’ll let you recover from the shock….But, here’s the problem we now have: banks still have hoards of cash in reserves. If they start lending—the money multiplier will exponentially increase money supply, causing inflation. What to do, what to do.
This is our issue, folks. Combined with our national debt, I cannot think of anything more challenging for our economy or stock market. If you notice— you won’t hear much about the debt issues in our Presidential debates this year. Right now—the dominating factors seem to be immigration, foreign policy, healthcare, and whatever free stuff the Democrats are peddling in this election cycle.
So, how do you stay focused with all of this racket going on? Here’s my formula for investors:
1) Remember, you have a plan for your investments. If you don’t have a planning strategy, or if you feel that your strategy needs to change, please don’t hesitate to reach out to our team. We are here for you.
2) This too, shall pass. The smaller the time frame that is used to analyze stock market movements, the scarier they become. You should be positioned for your investment funds to be long term investments. What does long-term mean? To me, it means 10+ years down the road. Investors who are feeling the most pain right now are the ones who: haven’t planned as they should have, are about to retire and haven’t planned as they should have, or have money they need for income and you guessed it—they haven’t planned as they should have.
3) Stop watching all of the garbage on TV. Our television programming is designed to do just that—program you to believe in whatever agenda is being promoted. Sometimes, you don’t even realize it. A large portion of people who write and report about finance have degrees in journalism—not economics or finance.
4) Create a gratitude journal. Now, I know this may sound kind of hokey, but it really works. I started a journal about a year ago, and I do my best to start each and every day actively writing down 3 things I’m thankful for that day. The challenge is to continue looking for new things to write about. It will open your mind to how blessed you are, despite any temporary hardship or setback.
5) Ignore the HERD. You were created to be unique—a true original. Your financial goals are yours. Stop letting outside influences impact your thought processes or decision-making. A common theme for people who fail at investing or at retirement is that they allow their emotions to win. Our job as advisors is to keep you on track—through good times and bad times. Seasons and cycles are part of this journey, we have to stick to our plan and keep our focus on things we can control.
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