Posted by on August 24, 2015
Written by Jill Boynton August 24, 2015
As you may be aware, US markets are bracing for another downturn this morning, following last week’s steep losses. “Corrections,” defined as a loss of 10% in the broad stock index, generally occur about once every 18 months or so; the last time we experienced this was 4 years ago! The primary culprit is the Chinese stock market, which has been in a bubble since June, when the Shanghai index fell over 30%. In an effort to prop up their slowing economy they recently devalued the yuan (the Chinese currency.) This stoked a fear across global markets that their situation is worse than previously thought. China is responsible for 15% of the world’s output but has contributed in the recent past up to 50% of global growth. In other words, 15% of what the world buys comes from China, but 50% of what the world produces is bought by China. If China slows down, so do many other world economies.
But slowing down is not the same thing as a recession. The International Monetary Fund forecasts a 6.8% expansion of the Chinese economy this year. Many economies, including ours, would be envious of such growth but following many years of double-digit growth this is a weak forecast for China.
While these events are having an important impact on stock markets today, no one knows what tomorrow will bring (or even later this afternoon.) Reacting to the downturn by selling would be counterproductive in the long run. As we have counseled throughout our relationship with you, the best course of action is to keep focused on the long-term and ride through these short-term events. Ron Lieber, a writer for the New York Times, said it best this morning in his article titled “Advice After Stock Market Drop: Take A Deep Breath and Don’t Do a Thing.”
Please bear in mind that your portfolio is diversified among many types of stock and bond holdings and for those of you taking withdrawals from the accounts you needn’t worry that we have to sell in a down market as you have a solid bond portfolio to tap if cash becomes low. To further put the losses in perspective, the major US stock indexes are now back where they were less than a year ago. Some healthy gains have been made since the dark days of 2008 and 2009. We are here if you wish to call.