Recent stock market decline considered long overdue

By Tony Wittkowski | Business Reporter | The Herald-Palladium

ST. JOSEPH — Speculation has been circling the U.S. stock market after it began its rapid decline last week.

U.S. stocks suffered their worst losses in four years at the end of a bruising week, as growing concerns about China’s economy pushed shares in the U.S. and Europe into what money managers call a “correction.”

Edward Jones financial advisor Bryan Tutton, whose work is based in Benton Harbor, said the decrease in stock value was a long time coming as a result of an extended bull market.

“It’s been several years since we had a normal correction,” Tutton said. “We won’t know what this is until it’s over. In a normal environment, this would be a normal correction.”

Since the early 1900s, the U.S. stock market has had an average of three 5 percent corrections and one 10 percent correction per year. These corrections require a trigger to set them off to level out what the market had gained. The Chinese stock market devaluation could have been one of the triggers.

Having a 10 percent drop each year is considered a normal thing, Tutton said. However, the U.S. has not experienced a true 10 percent correction in about three years.

With the 2008-09 financial crisis remaining fresh on everyone’s mind, advisors have been calling for investors to not compare this week’s downturn to what occurred six years ago. In 2008-09, there was a long decline in the stock market that continued for months. The current stock market fluctuation has lasted a week.

If it’s a short-term correction, the decline in points should not have an impact on the average worker as they invest in 401(k)s that are not going to be used for decades.

“It will probably not have an effect on people’s savings because the majority is tied up in long-term investments that will not be accessed for many years,” Tutton said. “My advice is to always look for quality investments, and hold them for longer periods of time. Sometimes a pullback is an opportunity to by a quality investment at a discount.”

Scott Schalk, a certified financial planner at Schalk and Associates in Berrien Springs, said there is no crystal ball when it comes to the stock market.

“A lot of what I think drives the market is uncertainty,” Schalk said. “Markets don’t like uncertainty. When there’s unrest overseas with China and Europe, then the markets tend to overreact to that uncertainty. When China talked about devaluing its currency it caused a shake-up. They are a big player, so they drive the global economy.”

In the near term, most analysts expect China to take the lead on the current pitfall and give global markets a direction to go in.

Most anticipate Chinese officials will take some sort of action – possibly another interest rate cut – to stem the shellacking that its stock market has taken since mid-June.

Schalk said it is difficult to compare the 2008-09 market downturn to what the U.S. is seeing now because there is no way to determine where it will bottom out.

“I think the market was due for a slight correction. This has been one of the longest bull run markets in history,” he said. “The question is if this is the beginning or just a blip on the radar. It was building up over time because we were fairly flat through 2015.”

Is the decline that bad?

Jenna Mitchell Everett, a certified financial planner for Everett & Associates in St. Joseph, said many analysts thought the market was fair valued at 18,000 points based on interest rates. However, Everett said she believes the market would be fair valued at 16,000 – which is where it closed at Wednesday.

Factors other than China’s influence is this nation’s debt and possible rising interest rates. Everett predicts the decline will continue into autumn as U.S. leaders begin their talks on the debt ceiling and interest rates.

If the market does stabilize next week or next month, Everett said there is a chance for another downturn as the U.S. has an election next year, which could create more uncertainty in 2016.

“We’ve been in a bull market for so many years without any meaningful setback,” Everett said. “Even today, we are still way above 2007 levels. One of the things we suggest is people look at percentages and not the points. It’s human nature to be concerned, but they should be focused on the long term.”

Schalk said investors will hopefully see the drop bottom out in the coming weeks. However, it is impossible to know if it is a true bottom or just a false rebound.

What has occurred over the last few days has made investors make emotional decisions rather than rational ones. Schalk said for the market to regain decent footing, investors should be less tepid about the future and plan ahead.

“It doesn’t really affect people from a job perspective. It’s a psychological effect,” Schalk said. “When they hear the bad news and open up their statements and see a drop, their first instinct is to sell. The key is to have people be proactive rather than reactive when it comes to their financial goals.”

Contact Tony Wittkowski at twittkowski@TheHP.com or (269) 932-0358. Follow him on Twitter @tonywittkowski.

(Author’s Note: This article was originally published on Aug. 27, 2015)

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