Been watching the Chinese economy tumble the last few months, waiting for the flow-on effect across other markets. If all you’ve been reading are page one stories you’ve been missing out. The pundit started talking the US markets only in the last several weeks, emphasizing a September crash around the Fed meeting. This week it looks like the western world is finally joining the crash.
How low will it go? I predict the DJIA will drop 40-50 percent in the next six months, from around 18,000 to about 10,000.
I don’t know, but I think yesterday and today’s drops are largely about the dropping price of oil and how heavily invested people are invested in the energy industry. But it should actually be a boon for the rest of the economy as oil prices continue to drop. I don’t know enough about China to know if their economic woes are just a market crash or actually revealing a serious integral problem. For us I think it’s just a market crash. However, I don’t gamble in the crooked casino directly, and I’m reviewing my retirement funds to see what I can do to protect them.
I don’t know. Nor does anyone else know. Maybe Duckster is right. Maybe the market will fall by 50% or more. On the other hand, maybe the market will start going up again tomorrow.
For the past couple years, I’ve had all my retirement savings in bonds for precisely this reason. Investing in stocks is like going to Vegas and “investing” in roulette.
And that’s the hard call. I’ve been watching the market hard this week, followed by the futures indexes just to run a comparison. Every day after the markets close the futures predicted an uptick, which never happened. Today the futures are reporting a strong slide come Monday. Of course, a lot can happen over the weekend (Korea?) that changes things again.
Some are advocating this is merely a reflection of the crude oil price slide and nothing more. But the page 82 stuff I’ve been reading for months has focused on the Chinese, and it is just a matter of time before the Chinese crash hits western markets. We will know more come Sunday when the Asian markets open (their Monday).
I don’t see how China’s markets could have a 50% effect on the US. Anyone who knew anything already acknowledged that Chinese markets did not have the safeguards and standards of the US market and that they were suffering from their housing bubble for quite some time. That doesn’t mean no downside to other world markets, but it should have limited our exposure and our surprise.
As with others, I think oil is more relevant than China. And Greece, for that matter. (Not that Greece is such a big deal by itself, but as a test of the Euro/EU, a bad precedent would not make you optimistic about its future.)
My personal feeling is that this summer is a good time to hold your current positions, but probably not a good time to make major changes.
The long-term appreciation of the stock market outweighs any short-term fluctuations, with an average return of about twice what bonds pay. Equities have to be the primary driver of your investment returns. Because you know that an occasional 50% drop is possible, you keep your portfolio diversified and you redistribute assets as needed to maintain the allocation that meets your risk targets. As you age, your risk targets should be increasingly conservative, but there’s never a time when you be entirely in bonds - or entirely in ANY single asset category.
In fact, if we’re going to compare it to roulette… investing in the stock market is like being the casino. Yeah, you might lose $100,000 one night when a high-roller hits it big, but the odds are in your favor, and you’ll make it back over time.
I don’t think the market insiders are any better at predicting this than I am. I read an article yesterday, where in the same paragraph had the market pessimistic because the Fed might raise rates, making borrowing more expensive, and then in the same breath someone said the market was pessimistic because the Fed might not raise rates, and that meant the Fed knew something the market didn’t. They are just spoiling for a correction, and they talked themselves into it. Once they look at the fundamentals, this will turn around and go back up. Or not.
P/Es aren’t exactly stretched, this bull is long in the tooth, interest rates are at record lows, commodity prices have been going down for months, September is historically high for crashes, risk-adjust returns are predicted to be low for the next decade, employment figures in the US are looking buoyant, Korea’s on ‘the brink of war’, globally markets have had a terrible week, and the S&P is in extremely oversold territory. It’s not a good time to be making major decisions that you may come to regret later on, it’s probably a good time to sit on your hands or do something else.
Looks like the final nail in the coffin (of the Obama legacy). The real danger now is that commodity prices will drop-which means that Brazil, India, Africa will be unable to buy all that stuff from China anymore. If we do see such deflation, we could be in for a long depression. Of course, one good thing is a big drop in the price of energy (though bad for solar energy and electric car makers). Tesla may well fail.
That’s nonsense and you should know it. This year has been flat but the prior two years have been runaway growth. If you’ve been in bonds - you don’t say which type - then maybe you’ve been getting 4%. So let’s look at it:
Say you start with $100,000
Five years at 4% and you end up with: $121,665.29
Real world indices
Start with $100,000
Five years at real growth you end up with: $201,135.71
The average return on the S&P500 over the last 5 years was 15.37%.
Even if you were in some of those crazy corporate bonds - I think CITI is still paying 8% on some issues to try to control their cash flow - you’d be at $146,932.81
Index funds or buy and hold mutual funds (I can point to several that consistently outperform indexes) far outperform over pretty much anything but a very short term timeframe.
The oil thing has been evident for a great many months now. As oil production expands - drill, baby, drill indeed - and efficiencies (as well as natural gas production) expand it’ll hammer the price of oil. And energy stocks and the energy economy make up something like 12-14% of US investments right now. Seeing the bottom drop out of 1/7 of the national economy hammers the markets.
It’s also true that we should see a rebound in a lot of other sectors, though. Anything reliant on transportation - agriculture, consumer goods, airlines - are all primed for a nice pop. But those things are trailing responders so it’ll be a month or two before those equities start to climb.
I have oil stocks and I’ll hold them. I’ll sell them during retirement, sometime between ten and 40 years from now - and the one thing an oil glut means is that we aren’t losing our oil dependence any time soon. And since I bought my oil stocks at some point during the BP Gulf of Mexico fiasco, I don’t think I’ve even lost money on them yet (we weren’t going to lose our dependence on it then either).
We seem to be heading into a post holiday clearance special in the market. And like shopping - if you can pick up next years Summer clothes for the kids on clearance this year, you’ll use them eventually. Yeah, a lot of people in the oil industry have already lost jobs, it will impact the economy - but on a larger scale, its cyclical.
The first Berkshire Hathaway meeting I went to Warren and Charlie said (paraphrased) “we lived through the Depression, we thought the world was going to end, it didn’t. We lived through WWII and we thought the world was going to end, it didn’t and the market recovered.” Since then I think about the market on that timescale - when you are 90, they are all blips.
And you’re absolutely right. I was at the office until about 8:30 or 9 last night taking calls to tell people ‘It’ll be all right. Calm down.’ and reading and sending guidance.
Anyone with a time frame longer than 5 years should be patient, throw extra cash into the market and be patient.
Remember, there’s never been a correction we haven’t grown back out of. Even the great depression and 2008 were recovered from in reasonably short order.
