As an investor, it’s not difficult to read the headlines from the last week and get spooked. The week started out with the Chinese stock market taking a nosedive due to lackluster manufacturing data, which caused other global markets to pull back as well, this not limiting the damage to just China. South of the border, the S&P 500 had its worst five trading days dating all the way back to the 1950’s. Canada wasn’t immune from the turmoil in the markets, with the Toronto stock exchange having officially entered bear market territory. Let’s take a closer look at what’s going on in the markets and why long-term investors have no reason to panic.
The Chinese Stock Market
There’s no way to sugar coat it – to say the Shanghai Composite Index had a rough week would definitely be an understatement. Trading was halted not once, but twice this week, after a plunge of more than seven percent. It was the first time China flipped the switch on the “circuit breaker” since its introduction last year. The circuit breaker is a term that describes when trading activity is suspended during times of market volatility. Major stock markets around the world, including New York and Toronto have a similar trigger.
There’s a lot of uncertainly in China right now. Slowing GDP growth, a possible real estate bubble and weak corporate earnings have investors worried. As the world’s second biggest economy, if there’s a financial meltdown in China, it could spill over into other countries. Unlike the U.S. where institutional investors drive the markets, it’s common folks like you and me who drive the markets in China. Even more worrisome is many are borrowing on margin under the assumption the stock market can only go up. If it doesn’t, not only will they lose their own money, they’ll lose borrowed money – double yikes!
Tension in the Middle East
Despite newfound tension in the Middle East, oil continued its trend downward this week. Oil continues to trade below $40 a barrel, with two of the major suppliers of oil, Saudi Arabia and Iran, causing much of the downward pressure. Saudi Arabia has gone as far as to sever diplomatic relations with Iran, which has the potential to threaten the world’s oil supply. Although this temporarily drove oil prices higher, oil resumed its descent downward.
Uncertainty in North America
Canada and the United States aren’t without their issues. In Canada, the newly-elected Liberal government is dealing with a larger-than-expected government deficit. This isn’t helped by falling oil revenues. Meanwhile, the loonie continues to fall to levels not seen in over a decade, hurting the purchasing power of Canadians.
In the U.S., although the Federal Reserve is raising interest rates, it’s far from in the clear. There’s a lot of uncertainty surrounding the economy. With presidential candidates from Donald Trump to Hilary Clinton with different views on how to handle the economy, without a crystal ball it’s hard to tell where the markets are heading.
Light at the end of the tunnel?
Does all this volatility mean that investors should cash out all their investments and hide the cash under their pillows? Most definitely not! The best advice we can offer to investors is to not panic and sell. You should, however, review your investment strategy to ensure that your investments are protected, even on the downside. We preach that it’s important to have a tactical approach within your portfolio. The challenge is that many mutual funds in the markets today are buy & hold (& hope). These strategies leave many investors vulnerable to volatile swings and even though markets do even out over the long term, huge losses can affect your overall bottom-line.
There are alternatives to the traditional mutual funds that many investors might qualify for but are unaware of. These are custom built portfolios managed by portfolio managers who take a tactical approach to managing investments with a view on minimizing losses. Their custom nature allows them to act or react rapidly if needed, something that traditional investments are not able to do, due to industry regulations. If you need help with assessing your portfolio, feel free to contact our office. We can sit down with you and help you figure out if 1.) You qualify and 2). What the best strategy for you considering the current market volatility.