September 2015

The dramatic swings on Wall Street over the past few weeks, including a 500+ point drop on August 24th, show markets flirting with a correction and even bear territory for some stocks. A correction is when the market drops between 10 and 20%; a “bear” market is called when the market drops more than 20%.

Corrections are fairly common and often considered a sign that the market had gotten bloated with some stocks having moved up with the momentum of the market, never mind the fundamentals. A correction allows the market to revalue stock prices more realistically and can create buying opportunities. So what triggered this sell-off? Two primary causes are China and the talk about the Fed raising interest rates with the China factor weighing the most. It wasn’t too long ago that China became the world’s second largest economy and there was even talk about China’s yuan overtaking the dollar as the world’s reserve currency. China’s growth has slowed considerably from 10.6% in 2010 to 7.4% in 2014 ( and estimates of 6-7% growth for 2015. That compares to our weak annual growth rates of 1-2.5% since 2008. And when the Fed finally does raise rates it will actually signal that they have more confidence in the economy.

The bottom line is that a correction was bound to happen and many expected it much sooner than this. Trying to time the market is a gamble with the most likely outcome of selling low and buying high, the exact opposite of what investors intend. US-based corporations are generally in strong financial positions after having learned a valuable lesson from the financial crisis. Most investors also learned a valuable lesson – patience through the volatility.