Tom: Today we are talking about market volatility, correct?
Mellody: Yes we are! Since December, the stock market has experienced a period of volatility that has been unsettling to many investors. After all, until August the U.S. indices experienced a bull market that lasted over six and half years! Because of this, many have forgotten that some bumpy periods are to be expected, and we have a tendency to get anxious and want to head for the exits. This morning, I want to talk about why we are seeing some of these ups and downs, what you should be doing, and what you shouldn’t be doing.
Tom: That sounds great. Why are we seeing this volatility?
Mellody: There are a number of factors that have gone into the rough patch lately. Once of the biggest reasons is concerns about global growth. As I have said, a number of times on Money Monday in the past year, the Chinese economy – a key engine of the global economy – has slowed dramatically after decades of incredible growth and investor uncertainty has emerged. Growth projections for Europe also look anemic, and emerging markets are having a tough time right now as well.
This has put some downward pressure on global markets. In the U.S., some of that pressure has been unwarranted, as many of the firms that have seen their stock prices fall do not have huge exposure to these markets, but the overall concern about global growth is there. While the American economy is expected to continue to grow steadily, exporters and other companies are certainly impacted.
On top of growth concerns, there have been a few other issues that have crept into the equation lately. One big piece is energy prices. Oil prices are at 12 year lows, and many of the largest companies in the world, such as Exxon Mobile, are getting hit hard. The once red-hot tech sector has also slowed down significantly, as consumers have reined in spending on consumer electronics, and investors are calculating that this sector might have reached a ceiling for the time being. All of these contributed to a sense of uncertainty. As a result, the markets have taken the opportunity to release some steam after a long bullish period.
Tom: Very good to know! Now what should we avoid doing right now?
Mellody: There are two big mistakes that people make in times of volatility. The first is to get caught up in anxiety or nervousness about your investments. For most investors, your retirement is still far off in the horizon, so while the immediate future may look tough, you are investing for the long haul.
Because of this, you have to resist the urge to follow your emotions and run for the exits in times of volatility. On the flip side, you also want to resist the urge to try to time the markets. Individual investors get burned in periods of instability when they start to try to be one step ahead of the markets. Don’t. This is a recipe for bad results.
Tom: So what should we be doing?