What to do in this Panicky Market

What to do in this Panicky Market

Some of the most entertaining times to be a long-term investor are those periods when short-term investors are looking over their shoulders for an excuse to sell.  They are convinced that the market is going to go down before they can get out, and so they jump on any bad news that comes across their Bloomberg screen.

Friday and now Monday too are marvelous times to see this in action.  With all the economic drama playing out in the world, there were plenty of opportunities to panic.  The Greek Prime Minister has resigned!  Sell!  China devalued its currency a few days ago by 2%!  Head for the hills!  Chinese stocks are tanking yet again!  Get out of American stocks while you can!  The Fed might raise short-term interest rates from zero to very nearly zero!  It is the end of the world!

Of course, a sober analyst might wonder whether a change in governance in a country whose GDP is a little less than half the market capitalization of Apple Computer Corp. is really going to move the needle on the value of U.S. stocks—especially now that Greece seems to have gotten the bailout it needs to stay in the Eurozone.  Chinese speculators are surely feeling pain as the Shanghai Composite Index goes into free-fall, but most U.S. investors are prohibited from investing in this tanking market.  If the market value of PetroChina, China Petroleum & Chemical and China Merchants Bank are less valuable today than they were a week or a month ago, does that mean that one should abandon U.S. stocks?  Does it mean that American blue chips are somehow less valuable?

Despite all the jitters investors have experienced over the past few months and despite the recent drop, the S&P 500 is down about 7% for the year as of market open on August 24. It was in positive territory as recently as August 19.

History of U.S. Stock Market Declines

Yes, it is “terrible news” that it hasn’t been this cheap to fill your gas tank in over a decade, and business that rely on energy to manufacture their goods are now forced to figure out what to do with the excess capital they’re not spending on fuel.

Oh, but it gets worse.  American corporations are “struggling” under the burden of enormous piles of cash they do not have a use for.  They may have no choice but to return some of that money back to shareholders in the form of record dividends.  Of course, you read about the risk to corporate profit margins.  It seems that unemployment is so low that wages for American workers are going up, and that could raise consumption and demand for products and services.

Meanwhile, contributions to 401(k) and other retirement plans are up dramatically, housing starts and the construction sector are booming, America’s biggest global economic competitor (China) is reeling, and the Federal Reserve might decide that it no longer has to keep short-term interest rates low because the emergency is over and the economy has recovered. 

Nobody would be surprised if the U.S. stock market suffered a 10% or even a 20% short-term decline, this year, or perhaps next year.  However, what can you do with that information?  Nobody would have been surprised if this had happened at any point in the long bull market that doubled your stock investments, and nobody can predict whether Friday and now Monday’s markets are a signal that the market will take a pause, or if Tuesday will bring us another wave of short-term euphoria measured mostly in sighs of relief.  In addition, if you do not know when to sell in this jittery market, how will you know when to buy back? 

We’ve been writing for some time about lower expected returns (See CAPE Crusader: Market Valuation as an Investment Timing Mechanism  and Investment Returns: What Should We Expect Going Forward?) and have adjusted portfolios accordingly in light of this and in consideration of when money is needed to meet cash flows associated with established goals — retirement or otherwise.

These short-term swings provide entertainment for some but very little useful information for a mature investor. If you are not entertained by watching people sell in a panic and then panic-buy their way back in when they realize things are not as dire as the headlines made them out to be, then you should probably watch a movie instead.

Stay disciplined. Focus on what you can control. Ignore the rest.

Kevin Kroskey, CFP®, MBA

 

Adapted and modified with permission from Bob Veres.