Stock Market Woes ... What's a Long Term Individual Investor to Do? ... Here's My Plan

Stock markets around the world fell heavily this past week, and the U.S. was no exception. It's likely that we will experience much turmoil and pricing volatility, both up and down, in coming weeks.

Oil prices and other commodities have fallen hard, and they appear to be headed lower.

But it's not all bad news. Gasoline at less than $2 per gallon in the near future looks like a very good bet, and prices for many imported products will remain stable or even go lower as low commodity costs and the strong dollar combine to increase consumer purchasing power. Meanwhile, interest rates will stay low for the next several years (even after a small bump by the Federal Reserve in either September or December).

Now we come to the cause for all the current angst --- excepting the U.S., a slowing global economy combined with uncertain and confused leadership in Communist China. A definite slowdown in China's growth and domestic unrest have created political problems which are the most likely cause of the current global stock market woes. The phrase 'He who rides a tiger may not dismount' seems to fit as China's leadership definitely has an economic and domestic tiger by the tail.

That in turn is creating much turmoil in emerging market economies as those countries try to compete with the Chinese to produce and export more 'stuff' to America and other developed countries. Accordingly, a race to the bottom for the affected currencies is a distinct possibility and concern. In any event, great turmoil in the bonds of those countries that have borrowed and owe U.S. dollars will now unfold as, due to the continuing strength of the dollar, their debts will rapidly grow in their own currencies, perhaps generating bond defaults and causing more trouble for bond investors down the road.

But here's the deal, my fellow American stock investors. The U.S. is doing better than all the rest with respect to economic growth, the dollar will stay strong, energy and other commodity prices will go lower, and U.S. interest rates and borrowing costs will stay low. And finally, economic growth and the jobs market in the U.S. will continue to improve modestly as inflation is nowhere on the horizon. To repeat, we can expect a modestly growing U.S. economy, albeit confronted with the potential of global deflation resulting from low oil prices, low commodity prices and the general economic slowing in the rest of the world, especially China. In the meantime, American consumers this Christmas season will have more money to spend as gasoline prices fall well below $2 per gallon, interest rates remain low and prices of imported consumer goods are affordable.

But what will happen to our stock market the next few weeks or months? The simple answer is that nobody knows.  Over the long haul, however, low inflation and low interest rates coupled with a growing U.S. economy and jobs market indicate that the U.S. should be fine.

Our biggest long term problems in need of solutions are the overall individual debt dependency and government spending levels. Those long existing issues aren't new for us, of course, but they definitely are troubling.

With that in mind, let's take a look at what individual investors should do with their money right now. Doing nothing is my plan of inaction, and I'll explain why you may wish to consider a similar approach in this season of angst.

5 Things Investors Shouldn't Do Now is worth reflecting upon in total, and #5 especially:

"5 --- After a market drop, or at any other time, no one knows what the market will do next. The one thing you can be fairly sure of is that the louder and more forcefully a market pundit voices his certainty about what is going to happen next, the more likely it is that he will turn out to be wrong.  Stocks could drop another 10% from here, or another 25% or 50%; they could stay flat; or they could go right back up again.  Diversification and patience — and, above all, self-knowledge — are your best weapons against this irreducible uncertainty."

This Week's Market Sell-Off May Not Be Such a Bad Thing says this in part about the U.S. situation:

"It has been a frantic week on Wall Street and in other financial centers, with stocks and other risky assets experiencing their worst week in years.

The 3.2 percent drop in the Standard & Poor’s 500-stock index on Friday culminated the worst week for United States stocks since 2011, and put the index 7.5 percent below its recent peak on May 21. Many global markets have performed even worse, with stocks down across Asia and Europe. And the price of oil and emerging market currencies around the world continued a decline that dates to last year. . . .

Market commentators offer a range of specific explanations for the sell-off, including a drop in oil prices thanks to a global supply glut (which will affect the profits of energy companies and oil-dependent emerging markets alike), a slowdown in the Chinese economy that is becoming more apparent by the day, and a credit squeeze in other emerging markets. But those explanations, while accurate, are part of a bigger story. . . .
 

The United States stock market, as measured by the S.&P. 500 . . . fell 5.8 percent this week and is now down 4 percent for the year. But that only pulls the index down to October 2014 levels. Against a longer time horizon, the recent drop looks more like a trivial downward bounce within a consistent range rather than something more dire.

Flat stock prices in 2015 mask what came before: a remarkable run-up in stock prices in the preceding half-decade. From mid-2009 to mid-2014, stock prices rose much faster than corporate earnings, or gross domestic product, or pretty much anything else you might think of as fundamentals. . . .

A mix of interventionist policies from the Federal Reserve and other central banks, and a global glut of investment capital have created a mismatch between the global economy, which has grown glacially, and markets, which have been on fire.

As Josh Brown of Ritholtz Wealth Management tweeted on Friday, “2015 is the first year since the recovery began where the real economy is outperforming the financial economy.”

The big question now is whether the fundamentals driving the recent sell-off — the oil glut, the emerging market strains — get worse or better. That matters a lot for businesses and individuals in China and other countries under stress, and for oil producers globally. But for the United States economy and even for most companies traded on American exchanges, it’s much less clear that it should create a major hit.

Consider that in 1997 and 1998, an emerging markets crisis rippled across East Asia and Russia. It turned out that 1999 was a blockbuster year for United States economic growth and corporate earnings anyway.

In the meantime, the best response for most investors trying to grapple with the latest bout of volatility is to take a deep breath, appreciate the remarkable run-up of the last five years, and remember that if you panic at the thought of losing 6 percent of your money in a week, that money really shouldn’t be invested in the stock market to begin with."

See also Advisers Reassure Clients on a Big Down Day.

Summing Up

Emotionally driven buying and selling, and short term knee jerk reactions to stock market moves don't make for successful long term individual investing results.

 

My plan has long been to own shares of a diversified portfolio consisting of solid blue chip companies which over time grow their sales and earnings, and pay increasing cash dividends.

 

These companies are able to pay those dividends as a result of long term oriented earnings growth, and this earnings growth in turn results in large measure from sales growth.

 

The sales growth comes from a combination of general economic growth as well as the competitive position of the company in the markets where it participates.

Stock prices over time are a result of both the overall economy's long term health and the individual health of the specific company.

 

Our U.S. economic health is improving, albeit slowly.

 

Since I'm in it for the long haul, what happened in the stock market last week or what happens next week won't cause me to panic and sell.

 

Of course, it's no fun watching stock prices fall, but neither is it fun watching our politicians make things harder for companies to succeed.

That said, at least we're not being governed by China's Communist Party.

 

That's my take.

 

Thanks. Bob.