Market corrections are always hard on investor psyche. Investors must maintain a focus and understanding that corrections are a natural, inevitable, and unpredictable part of market cycles.
The Dow Jones Industrial Average (the “Dow”) reached a record-setting high in June at 18,321. From that high through today, the Dow has corrected roughly 13-14%, trading more than 1,000 points lower during the first hour of trading today.
The US dollar versus major trading partners is weakening after a period of extreme strength – a positive for US export-based businesses. Chinese policy makers devalued the Yuan on August 11th, from 6.20/US$ to roughly 6.40/US$. This alone did not cause the recent market correction but was clearly unanticipated and contributed to further declines in Chinese stock exchanges.
US oil prices were slightly above $60/barrel in June and over $90/barrel last August. The decline is notable as oil prices have fallen steadily since last fall, trading at less than $39.00/barrel today. Gasoline prices in many regional US markets have followed, providing a positive economic stimulus for consumers and savers.
GDP growth this year continues at a modest pace, recently reported at 2.7% annualized growth. Employment statistics have been encouraging, although weekly hours and average hourly earnings numbers continue to be somewhat soft.
This Wednesday (8/26/2015) the annual Jackson Hole Symposium will be held, bringing together global central bankers, financiers, and market prognosticators. This meeting typically provides added color and insight into policymakers’ economic outlooks.
Coincidentally, this Thursday the US Bureau of Economic Analysis (BEA) will release updates to the 2nd Quarter US GDP numbers. Consensus estimates are for a 3.2% reported rate of growth – a very firm number and .5% above the number reported just one month ago.
In light of the recent global market developments, it strikes us the US Federal Reserve Open market Committee (FOMC) will be hard pressed to proceed with the much anticipated initial interest rate increase. In fact, this morning there is continued talk out of China for a new round of stimulus.
At MPWMI we have anticipated a market correction for some time as valuations had become stretched. We welcome this correction and believe it will be short lived due to consumer confidence and the propensity of central bankers to support markets.
After nearly thirty years of experiencing these inevitable periodic declines, I too find myself feeling uncomfortable. However, I know the time to be fearful is when others are greedy, and the time to be greedy is when others are fearful. With that in mind, we will weather the current correction.
When I first began investing in stocks the Dow was trading at roughly 1,800. This is a wonderful reminder of long-term perspective.