By Jill Schlesinger
Tribune Content Agency
Time flies when investors are enjoying a bull market. Until the recent correction, it had been four years since the last time the stock market declined by 10 percent. Before you start whining about the fate of your portfolio, it’s important to note that these pullbacks are a normal part of market action. According to Capital Research and Management Co., an investment firm, corrections of 10 percent occur about every year, so we have been long overdue for one. (Bear markets, marked by declines of 20 percent or more, occur about every three-and-a-half years, and the last one ended in March 2009.)
There were three main factors behind this correction: 1) fear of an economic slowdown in China, which officials in Beijing can’t stop; 2) a sell-off in commodities, which is pressuring emerging markets and commodity exporters like Australia, Canada, Brazil and Russia; and 3) concern about when the Federal Reserve will increase interest rates and how the liftoff will impact asset prices.
Many believe August 24 (aka “Black Monday,” when China’s main stock market index plunged 8.5 percent) was the beginning of the brutal downside action. Market observers talked about the spread of contagion from a collapse in the Chinese stock market to the Chinese economy, then to emerging market economies and finally to developed economies.
According to Capital Economics, a U.S.-based think tank, “The debacle in China’s equity market tells us little directly about what is going on in China’s economy.” The reason is that China’s massive bull market bubble, which began in 2014 and peaked on June 12th, “was speculative, rather than driven by any improvement in fundamentals. ... (W)e are witnessing the inevitable implosion of an equity market bubble.” Since the top, the bears have wiped out $4.5 trillion of Chinese stock market value.
Fear of a hard economic landing in China has been floating around for some time. In the big picture, the days of China’s double-digit growth rates are behind it. But because the total Chinese economy has increased in size, it continues to contribute more than a third of global growth. That’s why a slowdown in growth from the government’s 7 percent target, to something closer to 6 percent, will reduce Chinese demand for commodities. Hence the rout in oil (crude fell to the lowest price since March 2009), industrial metals and emerging market trading partners who export those items to China.
While the impact of China and falling commodities is important, some note that the selling pressure began on the Wednesday before Black Monday. That’s when minutes from the last Federal Reserve meeting were released. The officials’ views on current conditions painted a picture not of an economy rebounding strongly after a tough, weather-related first quarter but of one that still faces downside risk. All of the sudden, it appeared that the Fed was not entirely sure what was going on and how it would respond to global events - that uncertainty sent shivers across trading floors.
Here’s the good news: The first stock market correction in nearly four years has been a great reminder to investors of core concepts that can guide us through both good and bad times, the most important of which is that wild swings are part of being in the game. Because of that fact, investors should stick to a diversified portfolio, one that can help prevent them from jumping in after the market has already charged higher or succumbing to panic and selling when the market tumbles. They also need to rebalance their portfolios on a periodic basis to ensure that their allocations remain in check.
Another reminder: Do not keep money that you will need in the short term - for a tuition payment or other large purchase - invested in any asset that can fluctuate in value.
Contact Jill Schlesinger, senior business analyst for CBS News, at askjill@JillonMoney.com.
(c) 2015 JILL SCHLESINGER
DISTRIBUTED BY TRIBUNE CONTENT AGENCY, LLC
This column was printed in the October 18, 2015 - October 31, 2015 edition.