For investors, 2015 went out with a groan, but unfortunately, the start of 2016 hasn’t given anyone, anywhere, anything to cheer about. And just as was the case last year, the culprit and the catalyst for the market’s stumble, is China.
China’s reach is as great as any other country, in that they produce goods for trade partners around the world. And a slowing economy in China, which is what prompted the nervousness for investors both last fall, and today, certainly does have an impact on the global economy. Of course, any major economy, even if it is considered “emerging”, will impact those of their trade partners. Still, it is worth noting and remembering a couple of things about China which I had mentioned last year.
First, China’s economy has challenges, but those challenges, even though they impact the US, are external to the US. In other words, they are influences which are coming from outside our borders, not coming from within, which means the US is in a stronger position than if the opposite were true.
Second, and just as important, the reaction of investors and the stock market to news, especially unfavorable news, is always exaggerated. I don’t often use superlatives like never and always to describe anything related to investing, but this is one of my few exceptions. Investors are emotional, and they make emotionally-charged decisions, especially when those decisions are made with a short view of the future. Benjamin Graham, the father of value investing and Warren Buffett’s teacher and mentor, was fond of saying that in the short term, the markets act like a voting machine, but in the long term, they act like a weighing machine. The implication is that day-to-day, investors are going to overreact to news, often dramatically, but that over time, the truth and true value of investments are revealed.
For investors, the truth is simple. The economy in the US is stable, and it is growing slowly, but we also have our own challenges. Owing to the fact that we are in a rising interest rate environment, we have an investment headwind to deal with. This will make progress seem slow. It also means that US investors are likely to have a bumpy ride, because there isn’t much positive news coming from within, to offset the headwind we face and the news of external problems coming from other countries.
The strategy for handling this tumultuous environment is simple as well—stay the course. In this moment, it is important to remember that the underperformers of last year, and the start of this year—emerging markets, small company stocks and energy stocks—are all undervalued, and those countries and companies aren’t going anywhere. Over time, the true values of these investments will be revealed to investors, and it most certainly won’t be a reflection of the short-sightedness of emotional traders today.
Up, down, up, down, up… up. It isn’t much fun for investors but it is the reality for today, and the best perspective to take is to know that progress will be made, goals will be achieved and growth will be had, but it will take time, and the ride will not be smooth.
Travis Raish, CFA
Chief Investment Officer