China’s currency devaluation, the stock market correction and Powerball

Recent news headlines could drive you crazy:

China’s currency devaluation and fears of slower worldwide growth lead to a stock market correction;

North Korea claims to have detonated an H-bomb, but the US says “we don’t believe you”; and

Powerball hits a record $1.5 billion prize.

However, just as the record size of the Powerball jackpot is no cause to buy lottery tickets, the January jolt to stocks is no cause to deviate from your long-term investment plan … although it is wise to brace yourself for what is likely to be a choppy market ride in the new year.

Abby Joseph Cohen, president of Goldman Sachs Group Inc.’s Global Markets Institute says, this is “the S&P 500’s worst-ever start to a year [sending] the index down 7.5 percent in 2016, near lows seen during a rout over the summer.” See “Goldman Sees 11% Upside in S&P 500 After ‘Emotional’ Selloff” in Bloomberg News, January 14, 2016.

Ms. Cohen goes on to say, “What is happening is really very much an emotional response … We need to put things into perspective. Stocks are probably the best place to be.”

I agree. Predictions of a US major recession, let alone a full market collapse, have not come to pass.

In fact, US GDP has grown for all but one quarter since the end of 2011 and unemployment is down to 5%; US Dept. of Labor consumer price index is near 0% – as a measure of inflation. CIT Voice of the Middle Market, where 59% of the middle market corporate managers think that the best way to judge economy is to observe economic stability of their community, says that its 71% of the group say their companies are strong and 57% say they doing better than last year.

Yes, China’s growth is cooling down to a still very robust 6.5%. But China probably had to devalue currency to continue that growth.

Its stock market should have seen the stimulus as favorable but so many market investors in China are individuals with a short-term horizon that they could have been more concerned with buying power of their wealth and sold off their holdings. The more important long-term issues are the impact of China’s increasing debt and the impact of China’s devaluation on emerging markets.

Meanwhile, the US dollar remains strong, keeping gold prices down, and US corporate balance sheets are healthy, many having cash to raise dividends.

We remain in the third longest bull market in US history. And everything I read, from very optimistic articles to predictions of a crash, ends with something like “stick with high quality holdings.”

Some authors say this because they seek dividends, for income. But, with the Powerball in mind, I translate this to:

Short-term plays in the stock market are purely speculative, so if you want to grow your portfolio, stay out of that betting game.

You can buy a lottery ticket if you want to be speculative.

I conclude with these reminders you can chant as you read headlines on the stock market or watch TV news:

News headlines are not about me,

I won’t panic because I have a good investment plan, and

I will maintain a long-term perspective and stick to my plan

That worked well in 2008. Sticking to a long-term plan meant you participated when the market shot back up almost 10% in January of 2009.

Let me know if you want to share your comments and concerns.

Update: investing, Japan and long-term asset allocations … and donating to relief efforts

The press is full of commentary on the meltdown, cooling system repairs, cobbling together power supply lines, the dearth of inventory as certain plants…

But few comment on the long-term view, other than perhaps how long the radiation may be in the ground, the water or plants…

That is why I wanted to share a portion of the interviews of managers by MorningStar:
“A large group of successful fund managers says the sharp decline in Japanese equities over the past week is overdone. by Morningstar Analysts 03-21-11
“The MSCI Japan Index has declined 11.7% this month through March 16. Meanwhile the S&P 500 is down 5.2% and the MSCI EAFE is down 8.5% over the same period.
“Ben Inker, of GMO-run Wells Fargo Advantage Asset Allocation EAAFX, wrote in a note to clients this morning that corporate Japan can bounce back.
“ ‘Given the long duration nature of equities, where the bulk of value comes from the present value of dividends that will be paid 10 or more years in the future, we believe this event is unlikely to have material impact on the long-term fair value of corporate Japan,’ Inker wrote.”
From the excerpt, you can see why holding on and staying the course is again the best advice. In fact, many US stocks are already resurging, as are stock in other countries.
In fact, some managers are buying Japanese stocks because the shares are “oversold”

As I said, there are opportunities in volatility!

On the human side, there are ways to donate to relief efforts, such as: Global Giving

If you have other ideas on donations or questions on any of this, let me know.

Good luck!

Steven

Socially Responsible Investing and Going Green

More people ask about Socially Responsible Investing (“SRI”) and about “going green” these days.

My usual response is that you give up performance with SRI and suffer with higher fees and a limited universe of investments. It is therefore better to have a good investment plan and use money from that to support the causes important to you.

I have an article that I can send to you that gives both sides and some statistics. I have also read more in depth articles on SRI and specific funds.

The key observation is how broad or narrow the definitions of being socially responsible get in order to still have reasonable performance. Some funds even stray to get performance ……

On going green specifically, we have seen environmentally oriented mutual funds pop up since the oil scare of the 1970s. The conviction that alternative forms of energy will be necessary to meet global demand in coming decades has lead to responses by regulatory, corporate, consulting and other groups. Investors see that thinking green will be more than a passing fad.

As with SRI in general, the term “going green” has different meanings to different people and, unfortunately, to different managers and mutual funds. You need to be careful (1) that the fund invests in a way that you consider “green” and (2) that, in so doing, it has the potential to do well over time (i.e., its environmental goals do not frustrate its investment goals). The funds may be large cap, for global impact, or smaller cap, for more localized impact. The managers may not have experience with the new technologies. Furthermore, regulations are changing, which could have an impact on the companies in which the funds invest. Furthermore, large or small cap, the fund may not be well diversified because there are few companies that meet their investment criteria. So, you need to be careful in your selection.

As we said before, you may be better off to recycle, purchase conscientiously, invest well, and contribute to causes that will have a global impact rather than hoping for “making green from going green”.

If you want to discuss this, let me know please.