For investors discombobulated by the last few days of excruciating volatility in global stock markets, we have two things to say: You shouldn't be all that surprised, and, get used to it. And here's a piece of advice: Don't worry about it so much.
The swoon has been unnerving, to be sure. The
The source of the volatility? You can label the recent rout "made in
But investors who put the current slate of worries in perspective have every reason to remain confident--and invested--in U.S. stocks. Exports to
The U.S. economy. Growth is improving. Kiplinger expects GDP to rise 2.5% this year and 2.8% in 2016. Stock markets turn down before economies do, but the kind of excesses and imbalances that are often harbingers of recession are largely absent.
Corporate profits. Earnings have been lackluster for the past three quarters. But the weakness has been concentrated in the oil patch and in multinational companies whose earnings suffer when the dollar is rising. Kelly believes that both oil prices and the dollar have overshot where they should be--setting earnings up for recovery or rebound. "U.S. stocks are the highest-quality asset in the world, with the strongest balance sheets and the most consistent earnings, says
Overpriced stocks. You'd have to go back to 2013 to see stocks selling at the price-earnings ratios they command today, says
The Fed. The selloff may tempt the Federal Reserve to postpone the hike in short-term interest rates that so many prognosticators were expecting the central bank to announce in September. At the very least, market turmoil ensures that any increases come slowly and gradually.
There's no telling whether the selloff is over. But for now, a bear market isn't looming. "We don't think this will mushroom into a true bear market. You don't see the usual signposts," says Lafferty. "The U.S. economy is growing, earnings are positive, lending conditions are good--and you'd expect a 50% increase in oil prices to send you into recession, not a 50% decrease."
What should investors do? If you're a long-term investor--and if you don't have at least a five-year horizon you have no business being in stocks--you should look for bargains. Scary? Sure. But Kelly points out that investors who invested in the S&P 500 index at the peak of the market in
Nonetheless, buying what's worked in the past might not work now, says Suzuki. Stocks that have led this bull market have been driven by scarcity, he explains. In an environment of scarce economic growth the fastest growing companies--think Internet or biotech companies--have been the most popular with investors. You can say the same thing about the scarcity of yield in the bond market pushing the highest-yielding stocks higher--think utilities or companies that make consumer necessities. What makes sense now is a move toward the middle--stocks of companies that benefit from a growing economy and that pay steadily growing dividends. You'll find good candidates in the technology and industrial sectors, says Suzuki. In those sectors, look for companies with strong balance sheets and consistent earnings.
Lafferty is bargain hunting in financial stocks, in particular the big banks, both in the U.S. and in
Kelly's bargain-hunting formula is the simplest: "Whatever's down the most at the end of the day is what I'm going to like the most," he says.
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Anne Kates Smith is a Senior Editor at Kiplinger's Personal Finance.