The stock market in China is in a free fall. Everyone panic!
Wait. This seems familiar.
Maybe, it’s because I wrote about this same thing just a few months ago during the August Chinese stock market crash.
History. Learn. Repeat. Mistakes.
Bad News the U.S. Economy
I wrote a nice well-reasoned article recently about how you shouldn’t let bad news force you into making rash investment decisions. Here is another way to look at it courtesy of this repeat bit of stock market news.
This time we have a nice little confluence of factors. There is, of course, the plunging China stock market, but this time around we have a little extra fear in the form of a nuclear test that North Korea claims is a hydrogen bomb test. (Last time, it was Middle East instability.) Well, that doesn’t sound fun? As if that weren’t enough, oil prices are falling again, and for some parts of the stock market, that’s bad.
But, should we panic?
George Soros isn’t helping. He’s in the news comparing today to 2008, you know when major U.S. banking institutions were failing and the Fed had to rush in to keep the whole American economy from seizing up and failing. That seems a bit extreme, but he is a super-rich successful investor.
Then again, lost in all the noise from China is the U.S. labor market reports that show employment is picking up, which is good for the U.S.
So, what is a regular, long-term investor supposed to do?
Yeah, I know, you hate that answer.
Perhaps some charts will make you feel better.
Here is a one-year chart of the S&P 500. Notice the first China stock market panic there in August. Just a few days later, things started heading back to where they were before the China panic. Now, here comes panic number two. Notice, how so-far, it isn’t quite as deep as China panic number one.
Now, realistically, stock market moves like this don’t always unwind themselves this quickly, but it does show that a quick, rash, reaction to bad stack market news isn’t necessarily the right reaction.
What about this time?
Well, the reality is that the American economy is still growing very slowly with little, or no signs of inflation. Europe has stabilized for the time being, but certainly is not roaring back either. And, yes, the Chinese stock market is extremely volatile thanks to a combination of factors including government interference. Plus there are a lot of analysts and economists who believe the U.S. stock market still is overvalued. We’ll get to that in a second, but for now, let’s remember that if you are a long-term investor, these little one-year charts aren’t what you should be looking at anyway.
Here is a 5-year S&P 500 chart.
Hmmm. That China crash looks a little smaller now, doesn’t it.
Now, here is what you really want to be looking at. Notice from January 2012 through to about January 2015. See how the market just seems to go up and up. That isn’t sustainable unless the economy were roaring forward, which it isn’t. In other words, these flat areas, and even these big drops are actually healthy for the stock market. These blips prevent it from racing out so far ahead of reality that it has to come crashing down.
So, what can you do?
In a word, rebalance.
The year just ended, and if you haven’t rebalanced your portfolio, it’s one of the things you should be doing to make your finances strong in the new year. If it has been a while since you rebalanced last, you could be overloaded in same asset classes that are starting to look the most precarious. But, selling all your international, or dumping stocks altogether is not a good plan for long-term investors.
If you are approaching retirement, or your time frame is shorter now for other reasons, then it is indeed time to review your overall asset allocation. Let this shock be the thing that gets you in gear to prep your finances. But, if things aren’t any different in your life now than they were last year, or the year before, then remember that ups and downs are part of investing, and that your diversification and long-term time frame will get you through this, just like they get investors through everything else.