Going into the third quarter, investors were concerned about the unstable and fluid conditions in Greece. Attention soon turned to the downward trend in global growth aggravated by China’s economy. China’s equity markets have been on a roller coaster ride for the last year and started this quarter with a downward trajectory. Fear soon spread to stocks all over the globe and eventually reached our shores in August with the S&P 500 officially hitting correction territory – defined as a +10% decline.
For the quarter the S&P 500 was off 6.4%, the MSCI ACWI (All Country World Index) declined 9.3%, and emerging market stocks were down 17.9%. As you would expect, the higher volatility assets declined more than the S&P, but a brighter note, the alternative risk management strategies cushioned the downside or gained in value. China had the toughest quarter, with the Shanghai market down 29%.
China’s growth is slowing, as expected, and frankly the slowdown is intentional as part of China’s plan to rebalance the economy, making it more consumption-driven and less reliant on investment spending. As a result of China’s slowdown, other emerging market economies are feeling the effects.
As July began, most of Wall Street had expected the Fed to increase interest rates at its September meeting. The Fed itself had been more or less prepping us for an increase sooner than later. However, core inflation has been coming in below their target, unemployment remains above their target, and now foreign markets have come into question, so the Fed does not feel compelled to raise rates. At this point, the business community is ready for a rate hike and would like to see this uncertainty removed. An increase would signal that the economy is on a solid growth path and that alone could reduce investor anxiety.
Despite the market’s decline, prices on equities are still not cheap relative to historic norms. Does that mean investors should wait until prices go down further? Of course not. No one can predict where the market is going to go. As I mentioned in a March blog (click here to read), stock prices have been on the expensive side for a couple of years, but if you sat on the sideline waiting for stocks to get cheap you would have missed the +40% gain. Remember the S&P 500 hit an all-time high in May.
As far as waiting for economic data to improve, again sitting on the sidelines would do little to help you attain your long-term goals. During the 1980s, there were recessions, unemployment was high for most of the period, and the stock market crashed, yet arguably the strongest bull market for stocks and bonds began. Investors need to avoid the distractions of the short-term noise and stay focused on the long term. If you are investing for long-term needs, stay invested, but be prudent. Stay diversified, but manage the risk wisely. If stocks go up, you will participate, but if they go down, you won’t be as affected.
Washington Trust Bank believes that the information used in this study was obtained from reliable sources, but we do not guarantee its accuracy. Neither the information nor any opinion expressed constitutes a solicitation for business or a recommendation of the purchase or sale of securities or commodities.
Washington Trust Bank.