Stock market volatility this week was largely driven by fears of the impact to global markets from an economic slowdown in China. The Chinese economy is in the early stages of shifting from being manufacturing and exporting dependent to a consumer and service driven economy. This triggered the first stock market correction since 2011. A correction is defined as a decline of 10% or more. It is important to keep in mind that corrections are normal, healthy, and historically have occurred on average about twice a year. The majority of our clients have been investing with our firm or its predecessors for over 10 years. Together we have weathered previous volatile cycles like the bursting of the technology bubble in 2001 and the mortgage bubble leading to the Great Recession of 2008. Our clients understand that we are long-term investors.
At this point we believe that the current wave of market gyrations is likely to amount to a correction and not a more significant event as in 2008. Our perspective is based on the fact that the US economy is healthy and growing at a rate of 2% or more. Inflation is well-contained, and recent employment trends have been encouraging. It is reasonable to expect market volatility to stay elevated over the next few months as the markets react to periodic bouts of uncertainty and surprises. In spite of the recent correction, the valuation for the S&P 500 is still somewhat on the high side as compared to its 10-year average trailing P/E ratio of 15.7.
The U.S. economy is not heavily dependent upon China. Exports to China represent less than 1% of our country’s economic output. Additionally, Goldman Sachs estimates that the S&P 500 blue-chip companies collectively generate only about 2% of their revenue from China. Of course some companies individually have more exposure to China. We received a few inquiries from clients asking if this is a good time or not to jump in and invest idle cash. Our response is that on a day-to-day basis or over a very short-term time horizon of less than a year, the correct answer is that “no one knows for sure” because the stock market is largely driven in the short-term by sentiment and emotions.
We typically stay on the sidelines and do not do much trading when markets get extremely volatile. There is a classic investment saying about avoiding “catching a falling knife”. We have been looking at a number of additional ideas this week and also reviewing and stress-testing existing positions. We consistently try to find good points of entry to invest cash on an ongoing basis. We also tend to hold most of our positions for 3 to 5 years with an annual turnover ratio of only about 20%. If you have extra cash to invest toward long-term goals, anytime is generally a good time to add to your portfolio and we would invest accordingly where we believe we can find the best risk-adjusted returns given a client’s preferred risk model.
If you were hoping to make a market timing deposit at an opportune, market trough to speculate, make a quick return, and use your incremental cash and anticipated profits to meet short-term goals or even intermediate goals over the next couple of years, we advise against speculating because that is contrary to our belief that investors should not take more risk than needed to meet goals.
Please feel free to contact us anytime you have questions or concerns about your portfolio or planning issues to discuss. We appreciate your confidence in us and look forward to serving you!
Christopher P. Parr, CFP® George Johns, CFP®
The commentary above expresses the views of our firm as of the date indicated. Our views are subject to change without notice. Past performance is not an indication of future results. This commentary is being made available for educational purposes only. The information should not be construed as an offering of advisory services or an offer to buy any securities.