Market Turbulence: Nothing to Worry About Yet

Posted by Brad McMillan, CFA, CAIA, MAI

This entry was posted on Dec 16, 2014 2:27:23 PM

and tagged Investing

Leave a comment

market turbulenceOn the heels of our premortem of the stock market in 2015, let's take a look at the market turbulence we experienced last week and yesterday.

The short version? There’s nothing to worry about yet.

Where is the weakness coming from?

The largest factor is fears about global economic growth. Historically, declining oil prices have been a sign of trouble ahead for the global economy. To many, the recent collapse in prices suggests that we’re in for really tough times. Naturally, investors are pulling back on risk, stepping away from stocks, and getting more defensive in general.

The other major problem has been Russia. After hiking interest rates to panic levels last night but continuing to see the ruble decline in value, Russia is looking more and more like a crisis candidate. Russian collapse has kicked off international crises before, and a Russia under economic stress has a history of turning nasty militarily. These are real concerns.

Overall, though, the market doesn’t seem too worried

That said, the market is down less than 5 percent so far from all-time highs, suggesting that, at least here in the U.S., investors aren’t all that worried. Were the market seriously concerned, we would have seen more of a correction.

We may yet. Futures are down as I write this, and the press has started to make comparisons between now and 1998, the year of the last Russian financial crisis. With weakness in Europe, slowing growth in China, and a strong dollar putting pressure on emerging economies, a crisis in Russia could lead to further turmoil around Asia, rather than the other way around, as in 1997–1998. Things could get worse.

Here in the U.S., luckily, our exposure is indirect and limited. While there may be a short-term shock, lasting damage seems unlikely. Looking at 1997–1998, we see a decline in the S&P 500 but also a sharp recovery afterward.

market_turbulence

Then, as now, the U.S. had growing employment and an expanding economy. Then, as now, oil prices had declined substantially. There are a lot of similarities between then and now, and there will probably continue to be. We may well see some stock price declines, as we did in the late 1990s.

With a growing economy, however, we’re well positioned to ride out any systemic shocks and continue to expand.

Looking on the bright side . . .

We’ve talked about the potential negatives. Now let’s consider the positives:

  • First, low oil prices, in this case, are due to growing supply, not economic weakness. That’s a false signal, in my opinion.
  • Second, stock market volatility is normal. Last week’s movement is well within the normal range, and a weak week (especially off of all-time highs) is no reason to panic.

In other words, while we could well see more weakness, it certainly isn’t preordained, nor is it necessarily something to fret about, especially over the longer term. While there are indeed things to worry about and plan for, these recent declines aren’t among them.

                                     
5 Ways to Affiliate
Commonwealth Independent Advisor

Hot Topics

Have a Question?

New Call-to-action

Conversations

Subscribe via E-mail

Subscribe

Disclosure

The information on this website is intended for informational/educational purposes only and should not be construed as investment advice, a solicitation, or a recommendation to buy or sell any security or investment product. Please contact your financial professional for more information specific to your situation.

Certain sections of this commentary contain forward-looking statements that are based on our reasonable expectations, estimates, projections, and assumptions. Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. Past performance is not indicative of future results. Diversification does not assure a profit or protect against loss in declining markets.

The S&P 500 Index is a broad-based measurement of changes in stock market conditions based on the average performance of 500 widely held common stocks. All indices are unmanaged and investors cannot invest directly into an index.

The MSCI EAFE Index (Europe, Australasia, Far East) is a free float‐adjusted market capitalization index that is designed to measure the equity market performance of developed markets, excluding the U.S. and Canada. The MSCI EAFE Index consists of 21 developed market country indices.  

Third party links are provided to you as a courtesy. We make no representation as to the completeness or accuracy of information provided at these websites. Information on such sites, including third party links contained within, should not be construed as an endorsement or adoption by Commonwealth of any kind. You should consult with a financial advisor regarding your specific situation.

Member FINRASIPC

Please review our Terms of Use

Commonwealth Financial Network®