You will have heard on the news that a dramatic seesaw event has taken place and that volatility in the markets has increased recently. I’d like to take this opportunity to let you know what has happened and why you do not need to lose sleep.
Over the last year, Chinese investors, many of who are middle class people, have poured more and more money – sometimes borrowing to do so – into the Chinese stock market, driving up prices to bubble levels. The Shanghai index was driven to the peak on June 12, 2015 even though the economic growth in China slowed substantially in the last year. Since then, the market has been on huge swings, with a drop of -11.5% last week, and another -8.5% drop on Monday, August 24. The Chinese government has intervened in an attempt to stabilize their stock market by implementing securities regulations and stimulating growth by devaluing their currency.
Foreigners own less than 2% of Chinese shares and the developed nations have been largely unaffected, shrugging off the volatility in the Chinese stock market over the summer. On Friday, however, market jitters took hold and driven by disappointment in the lack of further intervention over the weekend by the Chinese government, speculators broadly sold off securities dramatically at the open, only to bounce back later that same day. Today, the markets have rebounded more than 300 points at the open. The Chinese government’s goal is to minimize damage to the real economy and leaders in the country still have impactful tools they can use to stimulate growth in China, besides devaluing their currency. Those tools include cutting taxes, building infrastructure, cutting interest rates and lowering reserve requirements on their national banks.
Keep in mind that the stock market is a leading indicator. The buying and selling that happens is due to investors making guesses about what is going to happen next, before it happens. If the stock market was based on a rational assessment of earnings of the publicly traded companies, share prices would not swing as dramatically as they do, since the earnings of companies do not change this dramatically! Our approach is always to evaluate the earnings growth of world economies and the businesses that make them up, and purchase the shares and bonds of those good quality businesses when they are lower than their expected value and hold them until they appreciate over time. We also collect the dividends that they pay in the meantime. This kind of volatility is driven more by irrationality than a fundamental shift in long-term earnings growth.
Please do not hesitate to call me if you’d like to discuss any aspect, direct at 1-800-798-0044