Blame China: Stock Market Panic January 2016 Edition

Blame China Stock Market Panic January 2016 EditionHere we go again: another round of doom and gloom as the markets swoon. The finger is being pointed at China for their volatile stock exchange and circuit breakers stopping trading there. Some speculate that it is a sign of China slowing down. Whatever. The market was volatile back in October 2014. It was volatile in August 2015. It was volatile in mid-December 2015. And it’s volatile now.  J.P. Morgan released an informative little “Guide to the Markets” at the end of the year. Yes, the same J.P. Morgan that I took vast amounts of clippings from the CEO’s letter in the 2014 annual report. But that is neither here nor there. Here are some slides I found interesting. Perhaps it will provide some perspective on all this doom and gloom prevailing in the financial media.


 
The following series of clips I took from the J.P. Morgan “Guide to the Markets” is a way for me to illustrate why my advice was so and how to think about the recent volatility in the markets. Here we go.

1

Markets go up and down. Up and down. Up and down.

2

Contrary to what you may hear in the financial media, the S&P 500 isn’t overvalued. It’s right smack in the middle of average.

3

To reiterate average: average.

4

You can’t predict currency movements. As a Canadian holding all equities in US dollars, even though the portfolio was negative for 2015, if everything were to be liquidated and cashed into Canadian dollars, the portfolio would have seen a gain. What a time to be alive. The earnings for the energy sector are interesting as well.

5

To reiterate once again how average the current market situation is, see the two right most boxes. Interesting also that mid-value returned the most since the market low of March 2009.

6

Interesting to see how the Russell Value weight is double in Financials as opposed to the S&P. Jamie Dimon did talk about how lingering biases from the last crisis is making investors hesitant to touch banks even though fundamentals have improved in the sector since 2009.

7

Some years the markets go up, some years it goes down, and some years it stays flat. This is the nature of equity ownership. Deal with it. Or if you can’t handle it, diversify accordingly.

8

This current market pullback will just be a blip given enough time. If you understand the history of the markets, you know that you will experience a tumultuous ride.

9

Dividends and buybacks seesaw in popularity. Cash has been increasing as a percentage of current assets on corporate balance sheets.

10

A neat way to look at recessions and bear markets that have occurred in the past 100 years.

11

Markets can go through extended periods of flat price appreciation. It’s best to keep this in mind. Sometimes you might have to wait years to see any price appreciation. Remember that market price does not always equal intrinsic value.

12

That thick blue column illustrates what they mean when they say we are a consumer driven society.

13

Not many surprises in this one.

14

A different perspective on how the economy is fairly average at the moment and not bubbling in some sort of anomaly.

15

I need to find how this would differ with the Canadian residential real estate market.

16

Lower growth in working age population and lower GDP growth going into the future: how does this affect future market performance, if at all?

17

With 51% of the US federal budget going towards “social safety net” expenses, that’s a lot of socialism in my opinion.

18

There really was a wide divergence between unemployment rate and YoY growth in wages with the financial crisis.

25

With the 0.25% increase last month, and stronger than expected job growth numbers, I assume we will finally be seeing higher interest rates moving forward.

26

This makes me wonder whether the low risk free rate since the financial crisis has funneled many investors who are yield-starved into equities over the years.

27

The US still makes up a sizable chunk of the bond market.

29

Just look at that disparity in 2000 between the earnings of the S&P 500 and the price index.

30

Canada is very reliant on export to the US. Good thing they don’t want to build a wall to the north.

31

Seeing how much of the world’s commodities that China consumes, it is understandable that there are worries of a slowdown. Especially for commodity companies.

32

Diversifying between equities and bonds will increase/decrease your volatility but also increase/decrease your return. It’s important to know what mix works for you.

33

Markets can do all sorts of things. We may want it to be an arrow that climbs consistently higher, but it’s not. It’s a lumpy ride. Look at how terrifying the 2000s were for the S&P 500.

35

The odds don’t seem the best, but damnit I’m going to live beyond 90 years. That means the assets I’m putting in place now should help severely elderly me way down the line. 100 year old me will thank me in 70ish years time. Unlike current me who is frustrated with 20 year old me…

 

36

Time in the market is infinitely more important than market timing. Find solid assets, figure out a fair price to pay, wait for said price, buy, and then just sit on your ass. That’s the formula.

37

Diversifying between bonds and stocks can shelter you from severe volatility but lead you similarish results over time. Of course, this is based on one range in time and does not encompass all data.

28

Could you have predicted the best fixed income returns by sector since 2005?

34

Could you have predicted the best asset class since 2000?

38

And to finish, the most important graph of all: the power of compounding. Compounding requires time. Lots of time. Selling assets purely based on price movement disrupts the compounding process. Ignore the noise.

Remember, in the long run, with a well diversified portfolio of strong assets, you will be fine in the end. Over stretches of decades, markets tend to work themselves out. Think long term. Conduct your affairs with the right temperament. Don’t get caught in knee-jerk, emotional responses to stimuli. You will be fine. Turn off the computer and go play outside.

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2 thoughts on “Blame China: Stock Market Panic January 2016 Edition

  1. I love slide 62. Really puts into perspective what you say about holding long term. Year to year is a basket case but over time you see a smoothness start to emerge. Great post!

    1. It goes hand and hand with the last slide on compounding: compounding takes time. One needs to be patient. If you need excitement, there’s always skydiving. Leave the assets alone, forget about them, and then go jump out of planes. Time is the greatest friend of the investor!

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