After months of speculation as to when the party was about to end, everything changed on Aug. 21 with steep declines in U.S. markets, followed by a rollercoaster ride that saw the Dow Jones Industrial Average (DJIA) start the trading day on Monday, Aug. 24 off by more than 1,000 points. Major ups and downs, which we haven’t seen the like of since the start of the financial crisis in August 2008, provided investors with a whipsaw of activity. The U.S. markets weathered a correction (a loss of 10 percent in the value of the Standard & Poor 500 index was logged during the last full week of August), having jogged along without a major sell-off for about four years. Although the 1,000 point plunge on Aug. 24 was undeniably brutal (before whip sawing to close down by 588.40) market experts have been quick to reassure individual investors and to provide information on the causes and conditions that led to the volatility.
Here’s a summary of some of the key discussion points.
- Don’t blame it all on China. The stock market rout was caused by global issues and the ensuing volatility is worldwide, too. Although the 38 percent drop in the Shanghai Composite Index (a rout that began in June) and the reported slowdown of the Chinese economy were major factors in the start of the stock sell-off here and worldwide, there are additional issues. Other large developing nations like Brazil are struggling, and European exchanges and international companies have been hit by the global slowdown that is rippling across the globe. Falling commodity prices have global consequences and lower oil prices, which have hit energy-producing nations in the Middle East, Latin America and Russia, add to the woes.
- The Federal Reserve’s monetary policy has global consequences. Any changes to the monetary policies of the Federal Reserve will generate concern both here and abroad. If, or when, the Fed raises interest rates, it will hurt emerging markets because overseas investment could taper off sharply as traders see the end of cheap dollars.
- By comparison with European and other nations, the U.S. economy looks good. It might be scant comfort, but compared to the rest of the world, the U.S. is doing well. The economy grew at 2.3 percent from April to June, and unemployment stood at 5.3 percent in July. Oil price declines have boosted consumer confidence and helped manufacturers that rely on petroleum products or natural gas.
- Volatility and corrections are normal in equity markets. Experts are urging individual investors to stay the course. It’s too early to say whether major volatility will be short-lived or linger for a while. Regardless of this, the experts discourage drastic action during correction periods. On average, we see the markets go through a 10 percent correction every 20 months or so. We’ve had a placid six-year bull run of gains and that may have made the recent bouts of turbulence especially unsettling. It’s easy to forget that corrections are inevitable and relatively insignificant over the long haul.
Bottom line: Resist the urge to make major changes based on stock market moves. If you are considering rebalancing your portfolio (six years of gains may have resulted in a disproportionate percentage of equities in your portfolio), don’t act without the advice of professional tax and investment advisors.