It was a rough week for stocks, here and around the world.
The Dow Jones Industrials fell by 500 points on Friday and the S&P 500 is now down over 5% for the week. The major indices are now in negative territory for the first time this year.
The major catalyst behind this decline is concern about China’s slowing growth and the effect it may have on commodity prices and economies around the world.
All economies work in cycles and China is no different. Growth ebbs and flows. Expansion is followed by contraction and then contraction is followed by growth. This should not come as a surprise to anyone.
But when things reach a tipping point many investors react as if the theater is on fire. They try and rush to the exit thinking they will only survive if they are the first ones out the door.
In reality, the theater may or may not be on fire. Yes China is slowing. Yes, China has problems, but it’s still growing faster than the U.S. and this may just be a bump in the road.
But even if China spirals into some terrible place and drags the markets further down, we don’t need to “rush for the exits” to survive. Periodic corrections are the rule, not the exception.
We have shared the chart below (courtesy of JP Morgan) on previous occasions to illustrate this point. The bars represent the annual returns of the S&P 500 from 1980 through June 2015. The red dots represent each year’s biggest intra-year decline. While the returns were positive in 27 of the 35 years illustrated, every year experienced an intra-year loss to some degree. (Click on the graphic to see a larger image.)
While we can’t avoid the corrections, we can anticipate them, and every one of our clients has a diversified portfolio specifically designed to help them achieve their long-term goals despite the ups and downs of the markets.