The S&P 500 is down about 2.4% year to date through Wednesday. Futures indicate the index will open down another 2% this morning.
Three factors seem to me to be involved in this weakness:
–the “normal” selling of last year’s winners that occurs each January by taxable investors who have nursed gains into the new tax year,
–the falling crude oil price, which some influential (algorithmic) traders continue to interpret as a sign of impending general economic weakness …meaning they sell not only oil stocks but also other sectors that are economically sensitive.
I think this connection will ultimately prove to be incorrect, but until we see the seasonal nadir for oil, which comes in late January or early February, what I think matters a lot less than what they do.
–worries about the Chinese stock market on the idea that it’s a leading indicator of the Chinese economy. This is a legitimate concern. Of course, a considerable part of the problem is the hangover from a not-yet-fully-deflated bubble created by wildly speculative, margin driven trading in 2014-15.
In fact, I find it hard to believe that the decline is the result of a sudden realization by Chinese investors of economic trends that have been in place in their country for several years. On the other hand, I don’t expect weakness in publicly traded, export-oriented state owned enterprises in China to go away soon.
What to do?
The reaction of most investors, including professionals, during times like this is to turn of their stock quote pages and just not look. This is a more viable strategy than it sounds. Another way of saying the same thing is that at some point we all have to have faith that we have crafted sound long-term portfolios. Being frightened out of good stocks by temporary bumps in the road would be a bad thing. So our number one priority should be not to dismember a good portfolio simply because the market is going down right now.
On the other hand, when the market is weak, there can be a chance to pick up interesting stocks at cheaper prices than normal. So if your stomach can take it, there’s a good reason to keep an eye on how Wall Street is doing, even if it’s punishing our holdings.