The Drama on Wall StreetSubmitted by Grunden Financial Advisory, Inc on January 12th, 2016
Have your long-term financial goals changed in the last three days?
Are American companies less valuable because investors in China are panicking?
Is there any reason to think that because Chinese investors are panicking, that Chinese companies are less valuable today than they were a few days ago?
These are the kinds of questions to ponder as you watch the U.S. stock market catch a cold after China sneezed. Since the beginning of the year, China closed its markets four times due to a rapid fall in share prices—a move which may have made the panic worse, since it made investors fear being trapped in stocks that are seen as dropping in value. It’s unclear exactly how or why, but the panic spread to global markets, with the S&P 500 falling over 6% to mark the worst first-of-the-year drop in history.
For long-term investors, the result is much the same as if you went to the grocery store and discovered that the prices had fallen roughly 6% across the board. At first, you might think this is a great bargain. But then you might wonder whether the prices will be even lower tomorrow or next week. One thing you probably wouldn’t worry about is whether prices will eventually go back up, like they always have in the past after the sales expire.
Will stocks? The truth is, nobody knows—and if you see pundits on TV say with certainty that they know where the markets are going, your first impulse should be to check their track record for predicting the future. Without a working crystal ball, it’s hard to know whether the markets are entering a correction phase which will make stocks even cheaper to buy, or whether people will wake up and realize that they don’t have to share the panic of Chinese investors on this side of the ocean. The good news is there appears to be no major economic disruption like the Wall Street derivatives mess that triggered the 2008 downturn. Additionally, the most recent jobs report from last Friday (1/8/16) showed a very positive 292,000 new people entering the job market, about 3% higher than most economist expected.
The best, sanest investors will once again watch the world’s stock markets for entertainment purposes with the understanding a good investment and financial plan backs them up. In fact, the savviest investors will actually add money to their accounts to take advantage of lower prices.