Maintaining perspective: why you should keep calm during a market pullback.
* 2nd quarter GDP was revised up to 3.9 percent
* Household balance sheets are in the best shape in 35 years * Weekly unemployment claims are near multi-decade lows
* Construction spending is posting double-digit annual growth rates
* Auto sales are near all-time highs
* Manufacturing has slowed (still expanding), but only represents 12 percent of the U.S economy
* The services sector is still in healthy expansion and represents the remaining 88 percent of the U.S. economy
* The budget deficit is currently 2.8 percent of GDP, down from 9.8 percent in 2009
Globally, there is concern about China's economy and whether or not it can sustain its long-term growth. China does have some sizable challenges to overcome as it moves closer to a democracy. However, efforts are already underway to shift businesses and resources into the suburbs of major metropolitan areas like Beijing, which will help reduce congestion and cool surging real estate prices. Government officials are working to make more utilities available and create healthy business climates in those surrounding areas. China may not be growing at the 10-15 percent clip from the early 2000s, but its economy is much larger now; 6-7 percent growth today is roughly the same in real terms as the 10-15 percent 10 years ago for China.
Overall, I think China is in a transition phase, not a decline, and it's going to take time for these changes to materialize. Even if efforts like these and others are only moderately successful, they could still help bring a huge new consumer base to the global marketplace.
Lower oil prices and a higher dollar have caused a lot of concern with earnings, especially for energy companies. Most analysts have dropped their expectations dramatically for the third and fourth quarters. If you look at the S&P500, the expectation is for a year-over-year decline in third quarter earnings, which historically has coincided with the beginning of a recession--but not always. If you simply remove the energy sector from the total, the earnings picture is much more positive. Energy is obviously a big part of our economy, but I don't see it as the catalyst for a recession. I think the longer-term picture is much more constructive. Could the markets slog along for another few months or maybe a year? No one knows for certain, but fundamentally there's still room for more growth.
In today's social media world, everyone with an opinion has a means to voice it, even if they don't have the facts to support it. Fear sells and people continue to buy it. Data suggest investors are more fearful today than in the depths of the financial crisis in 2008! I can understand a little unease, but this is a garden-variety market correction in my view that should not cause this type of panic. Investors tend to make emotional reactions because for whatever the reason "this time is different." Since 2008, there's been an inherent bias with investors towards the negative. Now more than ever, it's time to let the past go. Remember that it wasn't just the financial markets that were caught in the turmoil--real estate and many other markets were hit just as bad or worse, many of which have still not fully rebounded.
Uncertainty can create opportunity; it's happened several times since 2008 and those with a prudent investment strategy can take advantage of them. The facts show that this latest drop in the markets will ultimately be a blip in the bigger picture like many before it. Sticking to the data, maintaining composure and having a concrete investment plan are critical when markets get a little erratic. In doing so you will be able to take advantage of what the markets provide instead of making a knee-jerk reaction that could cost you in the long run.
* Source: First Trust Portfolios, Smead Capital Management, Bloomberg, Scott Grannis, S&P Capital IQ, FRED St. Louis Fed Research, CBO.gov, Charles Schwab
Investing in foreign securities presents certain risks not associated with domestic investments, such as currency fluctuation, political and economic instability, and different accounting standards. This may result in greater share price volatility.
Wells Fargo Advisors did not assist in the preparation of this report, and its accuracy and completeness are not guaranteed. The opinions expressed in this report are those of the author(s) and are not necessarily those of Wells Fargo Advisors or its affiliates. The material has been prepared or is distributed solely for information purposes and is not a solicitation or an offer to buy any security or instrument or to participate in any trading strategy. Past performance is no guarantee of future results. Additional information is available upon request.
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Matthew D. Pappas is an associate vice president, investment officer with the Cottonwood Group of Wells Fargo Advisors LLC, a wealth management team with offices in Salt Lake City, Park City and St. George. Its website is cottonwoodgrp.com.
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|Title Annotation:||Money Talk|
|Comment:||Maintaining perspective: why you should keep calm during a market pullback.(Money Talk)|
|Author:||Pappas, Matthew D.|
|Date:||Nov 1, 2015|
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