In the few days since the New Year, stock prices have suffered a very sharp pullback, losing some 5% of the S&P 500 in only the first four trading days of the year. So what’s going on?
Markets are reacting, and perhaps over reacting to a perception of a slowing global economy. Reports from China, suggest a continuation in a trend toward slow growth in the world’s second largest economy that once was expanding at rapid 12% per year, and now may be growing at only 4% or less. Meanwhile, stock prices in China have plunged in reaction, as the authorities there have again mismanaged market governance, causing global investors to feel even more nervous.
In the US, several industry sectors, such as energy, mining, transports, certain manufacturing and several other groups have slowed to at or near recession levels. The US employment picture however, remains fairly good, as the January 8th payroll report was quite positive, though many of the new jobs were lower paying or part time. Hourly earnings, an important measure of worker incomes has made only small gains recently.
Prices for important commodities such as energy, metals and others continue under pressure, further discouraging investors, who correlate strong commodities prices with growth.
The severe bout of selling in stocks, (but interestingly, not in high grade bonds) is the result of many hedge funds and other short term minded investors assuming there will be no meaningful earnings growth this year, and therefore no upside in stocks. This estimation may prove correct in the short term, so it is sensible to expect a negative stock environment for the time being.
For those of us who are long term investors, we need not over react, as we have a longstanding Investment Plan in place. There is no need to make any further changes to portfolios at this time, though additional reduction of selected positions may occur in the coming weeks. In order to derive a positive return for this year, the Plan is to selectively add to dividend and interest paying assets such as Verizon, (5% dividend), Proctor & Gamble (3.8% dividend) TLT US Treasury Bond ETF (2.8% Income) and others that maintain stability, pay income and can offer growth in a negative environment.
In previous down cycles, this strategy of staying the course with highest quality assets, strong dividend payments and cash reserves has resulted in total returns that often delivered gains when most investors were losing. Election years when a new President is chosen have often been negative for stocks until the period just before the election, where stock prices may stage a significant recovery. This may well be the case this year.