The Current Market Turmoil
By Eliseo "Jojo" Prisno, CRPC, MS
Chartered Retirement Planning Counselor
PE CAPITAL INVESTMENTS
The day I wrote this article, the Dow Jones index went into a wild ride of losing 1,000 points when the market opened (9:30 AM EST) then gained 800 points in 2 hours then lost steam to lose 300 points by the time it closed. Taking into account the previous trade day losses, the index as of this writing lost about 2,000 points, getting it into correction territory. What triggered this considering 6 weeks before the index achieved a new all-time high?
Several events in the six weeks span contributed to this current stock market debacle. It started with the Greece bailout, Puerto Rico’s debt issue, weakness in commodity prices led by oil’s ongoing weakness and China’s stock market slowdown. When China tried to pump-prime their stock market by instituting direct investing (the government using their reserves to buy equities), instead of helping it get buoyed, the effect was actually the other way around, most investors went into massive selling thinking that direct government intervention creates superficial valuation. The massive selling also led China to devalue their currency pre-empting a potential move from the US to increase FED rates. The Yuan devaluation led to currency wars across the global emerging markets with the Russian Ruble losing 20% and most Asian currencies losing value to the USD including our Philippine Peso. In six weeks, from P43 to a US dollar, is now currently pegged at P47, a 9.5% devaluation in a mere 3 weeks. China’s stock market as of this writing already lost 40% and most US indexes (S&P 500, Dow Jones and NASDAQ) now in correction territory (losing more than 10% from recent highs). With most emerging markets (the likes of Russia, Brazil, South Korea and South East Asian countries including the Philippines) already lost more than 10% in their stock markets, Japan being officially in recession, recovery slowdown in Europe and even our neighbor up north, Canada also in recession officially. How will these global events affect the US economy in general? Is the current stock market correction a manifestation that the US economy will follow suit into a new recession? These questions are what most investors are trying to be certain, and the uncertainty leads others to panic which eventually leads to the massive selling like last August.
As a witness of the 1997 currency crises in Asia, the technology bubble in 1999 and a survivor of the 2008 financial crises (I was with Merrill Lynch at that time), my take on these events is simply to advise all investors out there to stay calm but yet be vigilant. Stay calm because these gyrations are temporary as what we’ve seen in the most recent financial crises. Those that didn’t panic and had faith in their stock portfolios in 2008, in a span of 3 years they were made whole and the next 3 years gave them sizable returns.
Looking at these figures, despite the massive losses in 2008, by 2012 those that stayed put recovered back their original principal to more than the 2007 levels. This is proof of how our markets are efficient. Also, remember that what transpired in 2008 was a domestic financial crisis, a meltdown on mortgage debt which led to a global contagion, an event that most economists view, could only happen once in a lifetime. The worst crisis before this was the great depression in 1929. Note that between 1929 and 2008 were two world wars, four major wars which America fought and financed and several economic debacles, yet nothing equaled to the systemic risk in 2008. What’s going on today is simply one of those “correction” events that come in every now and then. A stock market that keeps on rising is inflationary and inflation can also lead to systemic risks, thus I would say, what’s going on is part of the market’s efficiency.
Here are 5 major reasons why we should be calm (I took this macro perspective from Rick Newman’s article on Yahoo Finance http://finance.yahoo.com/news/5-ways-to-stay-calm-as-markets-plunge-145416822.html, written on the same day I wrote this article):
“This is nothing like the 2008 crash. The economic situation back then was awful, and the stock-market crash in the fall of 2008 would have kicked off a full-blown depression if not for aggressive government intervention. That’s not happening now. The nation’s biggest banks were at risk of failing in 2008; they’re in good shape today. Millions of homeowners had mortgages they couldn’t pay back in 2008, which marked the beginning of a foreclosure epidemic. But careful lending since then has left borrowers much more stable. Finally, many reforms have been implemented since 2008 to prevent meltdowns like that one. Wall Street often bellyaches about overregulation, but those reforms have made the banking system safer and far less prone to panic. Economists at Citi note that only 5 of 16 indicators on their “bear market checklist” are flashing red. Before the 2008 crash, 12 indicators were flashing red.
“This suggests that a sustained bear market is unlikely,” the Citi economists conclude.
The U.S. economy is looking good. It’s not growing as rapidly as it did in the past, but it’s still growing. Employers have added nearly 1.5 million new jobs this year alone, and 11.6 million during the last 5 years. Consumers are spending more, the housing market is finally improving and auto sales are on pace for the strongest year ever. The risk of another recession is just 8%, according to Moody’s Analytics. And stock-market declines don’t usually prompt recessions; they merely reflect worries about the real economy.
Stocks are still up sharply over the last 6 years. The bull market rally began in March of 2009. The S&P 500 is still up 187% since then -- a huge rally. In that context, the 8% decline we’ve seen this year is a tiny squiggle on an otherwise upward line.
The Fed can step in if things get really bad. It’s possible that the current slump, which emanated from China, signals a global recession or something similarly ominous. If so, the Federal Reserve still has some tools it can deploy to contain the damage. As every investor knows, the Fed has been signaling that interest-rate hikes are coming soon. It could reverse itself and postpone the start of a tightening cycle. It could also resume quantitative easing, the super-easy monetary policy it halted last year. The Fed wants to cut back on stimulus rather than double down, but chair Janet Yellen is a dove likely to do whatever’s necessary if a recession seems likely.
Bargains will materialize. Wall Street traders are already hunting for stocks and other assets that have fallen by more than fundamentals may warrant and are likely to recover nicely. European and Japanese stocks may get snapped up first, because central banks in those regions are more likely to revert to aggressive stimulus measures than the Federal Reserve is. U.S. shares, considered more generously valued, could trail other markets for a while. It may not be time just yet to “buy the dip,” but that time always arrives. And you’ll never notice if you’re panicking.”
If you ask me, my take on this current correction is a window to get invested in the stock market, a perfect entry point of buying the market at a low. Again, investing is an act of faith. Else, if we cannot trust the system, might as well be six feet down under. For those who want to start investing in the market, contact your financial professionals licensed to deal with securities.
ABOUT THE WRITER: Eliseo Jojo Prisno is a Chartered Retirement Planning Counselor (CRPC).He founded P/E Capital Investments in 2010, a State Registered Investment Advisory Firm (CRD# 172695) and is currently the firm’s Managing Director and Senior Investment Advisor. Mr. Prisno also manages a Fund of Funds investment program with Ameritas and runs an All-Equity Growth and Income customized portfolios in separate accounts via E*Trade Securities. If you have questions email j.prisno@PEcapitalinvestments.com or call 1-888-929-2825. Visit our website www.PEcapitalinvestments.com