A long-awaited retreat in U.S. stock markets turned into a rout Monday, leaving investors feeling exposed and uncertain about what to do.
Investment advisers and money managers on Monday provided the standard advice — don’t panic or make any rash moves.
“We think this is just a correction,” said KC Mathews, chief investment officer at UMB Bank.
U.S. stock indices had gone nearly 1,000 days without a 10 percent decline from their recent peaks, an unusually long stretch given that corrections usually happen once a year on average.
That long calm lulled investors into a false sense of security and left many unprepared for a correction that hit hard when it finally arrived.
“Investors need to reacquaint themselves with a higher-volatility market, but the recent selling has restored some value to many asset classes,” Russ Koesterich, global chief investment strategist at Black Rock, the world’s largest asset manager, said in a market note.
“Assuming the global economy continues to expand, we believe this has created opportunities for investors with longer-term time horizons,” he said.
Corrections usually work themselves out within three months. But a recession could turn a correction into a full-blown bear market, defined as a 20 percent or greater decline.
Other economic indicators — auto sales, housing starts and hiring — point to a U.S. economy moving forward, not backward.
That said, the market downturn has wiped about $5 trillion in value from global assets, including currencies and commodities, and some major financial players might have suffered wounds they won’t recover from.
Michael Ball, portfolio manager of Weatherstone Capital Management in Northglenn, said he doesn’t rule out the possibility of a modest bear market but doesn’t see one as likely in the near-term.
“Over the next several weeks, it would take something pretty impressive to get people anxious,” said Ball, who
China’s economic slowdown has unsettled global stock markets, and more surprises might yet come out of the world’s second- largest economy.
U.S. imports to China are relatively modest, about $123 billion last year, but China has been a big buyer of commodities from emerging market countries.
About one-third of earnings at S&P 500 companies come from abroad, so U.S. multinationals won’t escape the slowdown around the rest of the world.
Big market declines also hurt consumer confidence, which could translate into reduced spending. But with 90 percent of U.S. equities held by the wealthiest 10 percent of the population, those best able to absorb a loss are the ones taking the biggest hit.
That is a significant difference from the housing downturn last decade, when legions of first-time buyers and former renters defaulted on loans and lost their homes, dragging down the larger economy.
Another weight on the market has been the possibility of a Federal Reserve interest rate hike in September, although the expectation is now growing that the Fed soon will communicate a delay in those plans, which would boost markets.
Of special concern are older investors who loaded up on stocks, given the paltry yields available in fixed-income investments. They don’t have time to wait out a recovery if things get a lot worse.
Investors, regardless of age, should look at their investment holdings and ask whether they can stomach another 10 percent or 15 percent decline, Ball said.
“If you can still sleep at night, then you are at a point where you could stay put,” Ball said, adding that those who can’t should adopt a more conservative approach.
But any adjustments should be made within the context of a bigger plan, not as a spur-of-the-moment reaction.
“It is best to take a longer horizon perspective, eliminate the day trading and not be tempted by market volatility to sell low and buy high,” advised Campbell Harvey, a business professor at Duke University’s Fuqua School of Business.
Aldo Svaldi: 303-954-1410, asvaldi@denverpost.com or twitter.com/aldosvaldi
