This is Not a Lehman Moment!

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This is Not a Lehman Moment!

Certainly stock market declines of the nature that we have experienced in the past couple of days are unnerving.  Recollection of the 2007-2009 market decline is very fresh in investors’ minds. It is important to keep these events in perspective. The previous decline was a reaction to a financial system on the brink, a real crisis in confidence in the entire financial system. This is not the case today. In other words, this is not a Lehman moment!

So, what is going on? >      This is merely a reset of global growth expectations. It’s becoming clear that the global economy, likely in part due to demographics, is going to be in a much slower growth pattern than has historically been the case. >      If global economic growth is lower, then future earnings growth must be lower too. Earnings are what moves stock prices and that’s why stocks are going lower, to reset to new lower growth expectations. >      Good news is that U.S. earnings expectations are not very high anyway, however, everyone has been suspicious of China’s reported economic data and given all the actions the government has been taking to stabilize growth, the suspicions are confirmed and China is likely growing slower than previously thought. >      Market valuation is not at the same high level that it was in 2007, it is much more reasonable. >      Our economy is still growing steadily. Our largest trading partners are Canada, China, and Mexico. China’s citizens are not heavily involved in their stock market so our exports to China may not even be impacted too much. >      U.S. new home sales in July were at their highest level since July 2007; auto sales are at best pace in a decade; labor market improved. >     Europe has become more stable despite Greece’s Prime Minister, Alexis Tsipras’ recent resignation.  European growth is firming, but certainly not robust. Recent Eurozone PMI came in at 54.1, signaling the best expansion in some time for the manufacturing sector. >     U.S. has gone 1,418 calendar days without a 10% correction, the 3rd longest in the past 50 years. The DOW and S&P 500 have now corrected 10% from their May 2015 highs. 10% corrections are normal and healthy, even though they do not feel very good, especially when they happen as quickly as this one. >     The Fed has not been clear on its direction and that has spooked markets as well. Market volatility may push off a rate hike until at least December. >     Most portfolios are diversified and are not fully invested in stocks. Bonds have rallied so that side of your portfolio should have gained in value to help offset equity declines.

Investors in the equity markets know that long term value is achieved only when a long term perspective can be maintained. Volatility like this is difficult to tolerate over the short term but might be easier if the media was as vocal about the gains in your bond portfolio that were serving to mitigate some of the short term equity declines.

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