Given the downturn in the market and increase in stock market volatility, many investors are wondering if it’s time to rethink their portfolio. The downdraft started when China recently devalued their currency in an effort to make their exported goods cheaper to boost their economy. They did this because their economic growth, while strong compared to most developed nations, is slowing more than expected. This move will make products we buy from China cheaper, however it will make goods we export to them more expensive. Think of Coke or Pepsi- their China sales will probably be hampered because the price of pop in Chinese currency just went up.
While the downdraft started because of China, that may or may not be the reason it continued. The market may have continued to sell of simply because it had been a long time since the market has had a pullback of any significance. If part of the pullback is due to non-fundamental reasons, we think it will be short term. Market pullbacks of 10-15% are very common and usually happen every 12-18 months. It’s been much longer than that since we’ve had a pullback over 10%.
On the U.S. front with the most recent 2nd Quarter GDP estimate of 3.7%, the U.S. economy continues to grow. We expect full year U.S. GDP to come in between 2-2.5% and it’s likely to continue to show moderate growth in 2016. The unemployment rate is currently at 5.3% which is the lowest it’s been since the recession began in 2008. Housing activity is strong and manufacturing surveys continue to show that the economy is in an expansion phase.
While it is perfectly reasonable to be concerned with recent market volatility, we continue to believe investors are best served by developing a well-thought-out investment plan that reflects their need, ability and willingness to take risk and sticking to it. The worst investment decision someone could make would be to sell completely out of equities because they are afraid. While a disciplined approach can be challenging to maintain during periods like these, evidence shows that it is the surest path to achieving financial goals. That being said, if a market drop like the recent plunge really frightens you then your tolerance for risk may have been misjudged and should be re-evaluated. Perhaps moving to a more conservative allocation may make sense. It is not uncommon for an individual to be comfortable with taking risk as the market is rising, only to realize their true risk tolerance during more challenging markets.