Investors advised to sit tight
Professionals say the U.S. economy is OK, despite stock market turbulence.
A major bank’s economist, a wealth management professional and a local long-term observer of the stock market all advise investors not to panic and join the sell-off.
In fact, long-time GVSU finance professor Gregg Dimkoff told his classes last week just what he always says when there are major sell-offs in the market: “Stocks are on sale this week.”
“Yet when stocks go down, people are selling, not buying,” he added.
Laina Mills, a senior portfolio manager at wealth management firm Legacy Trust in Grand Rapids, advised her clients last week during the roller-coaster ride on the stock market that “market volatility has been overdue for some time. Recall that the S&P 500 has delivered an average annualized return of 14 percent over the past three years and that we have not experienced a meaningful price drop since 2011, which is highly unusual by historical standards.”
She said Legacy Trust prepares for anticipated volatility by holding increased amounts in “defensive long/short investments and by holding high-quality companies with sound balance sheets that can ride out the storm.”
Mills said, “U.S. economic fundamentals remain solid and supportive. Extended stock market declines have historically been kicked off by an economic downturn, which we do not foresee. On the contrary, the U.S. economy is growing at an annualized pace of 3 percent and the labor market appears firm, with all indications showing that we appear to still be solidly in the midst of an economic expansion.”
Then there is PNC Bank, based in Pittsburgh but with a major presence in Michigan. PNC’s economists said when the market turmoil started Aug. 21, the stock selloff does not indicate problems in the U.S. economy, citing good news regarding home sales and a gradually declining unemployment rate. The rate was 5.3 percent nationally in July, but PNC believes it will be around 5 percent at the end of 2015.
The economic outlook is bright in West and Southwest Michigan, in particular. Kurt Rankin, a PNC economist who studies West and Southwest Michigan, said the region and all of its metro areas are “doing wonderfully.”
He noted unemployment continues to fall, “and Grand Rapids is at the head of that job creation, in all the right industries,” including high-paying industries such as manufacturing, in general, and transportation manufacturing, in particular. Rankin said economic vitality is filtering down to boost consumer activity throughout the general economy.
“All of these industries are outpacing state, regional and national averages, and Grand Rapids, within the broader region, is the strongest among them,” said Rankin.
Rankin said behind the market turmoil are two factors: One is an assumption that China’s economy will continue to flail, and the other is simply that stocks have been overvalued in the U.S.
“The U.S. economy is not doing poorly, and a dramatic fall (in the market) is not an indictment of the state of the U.S. economy. But the U.S. economy is not growing strongly and has very little prospect of doing so. It is possible for the stock market to get overvalued in that environment,” said Rankin.
He noted the “correction” in the stock market has been predicted for the past three years.
Mills said Legacy Trust coaches its clients to “not make any hasty decisions” about their investments.
Mills believes the signs of an economic slowdown in China are troubling “and bear continued scrutiny.” However, she adds, “The direct impact on the U.S. should be limited. Only 2 percent of S&P 500 company revenue comes from China, and a recent analysis by economists at Goldman Sachs estimates that a 1 percent decline in China GDP growth would result in a modest 0.06 percent decline in U.S. growth.”
“Our emerging market equity investments will undoubtedly be affected in the short-run, but the long-term consumer growth story in these markets remains intact,” she added.
To Dimkoff, the market turbulence in August, when compared to the U.S. economy in 2008, “seems like night and day.” In 2008, the U.S. economy was continuing to weaken because the real estate bubble had burst and that led to a major financial crisis.
“This time, the U.S. is in apparently really good shape,” said Dimkoff.
He noted the unemployment rate is nationally about as low as the government would ever expect it to get.
“We don’t have the best (GDP) growth in the world, but it’s still 2 percent. That’s better than most places, anyway,” added Dimkoff.
What’s happening now in the U.S., he said, is being driven by economic situations in China and Europe.
The recovery from the Great Recession officially began March 9, 2009, said Dimkoff, because all the indexes show it reached its lowest point on that day. “It’s been almost straight up since then,” he added.
“That was the best day to buy (stocks). But the stock markets never would have gotten that low if people were not panicking and selling, turning paper losses into real losses.”
And that was more than six years ago.
“People have forgotten that the market routinely goes through little periods,” said Dimkoff. “Some people call them adjustments or corrections, but, historically, it has not been unusual for the market, in its normal movements, to drop 10 percent or 15 — sometimes even 20. Half the time it means something, and the other half of the time, we just shrug our shoulders and say, ‘Whatever that was, we’re glad it’s over.’”
Since the 1920s, the stock markets have returned about 9 percent a year to investors, based on the indexes, said Dimkoff. But some of the biggest mutual fund companies studied well-known individuals who were reputed to be expert investors, and “those individual investors turned the 9 percent a year into only about 3 percent.”
How did that happen?
“They think they can time the market. They can’t — there is no proof anyone can, consistently.”
He said the one big thing that happens is, when the market is diving, investors sell, intending to get back in when it starts up. Inevitably, they wait too long and prices have already shot back up.
“The problem is we don’t know the turning points; we can’t predict the markets. So they sold low and get back in when prices are high.”
“That,” said Dimkoff, “is why advisors say just stay put. And they spend a lot of time holding people’s hands when stuff like this happens. And they are exactly right.”