Concerns About China Knock Stocks Lower

KALAMAZOO, Mich. - Jan. 12, 2016 - PRLog -- 2016's First Trading Day

Stocks dropped around the world on 2016's first trading day, triggered by fears of even slower Chinese economic growth. Two indexes showed further weakness in China's manufacturing economy in December, rekindling concerns about the slowdown. In contrast, China's services sector continued to expand, but its growth has not been enough to offset the manufacturing slowdown. As a result, Chinese stocks fell 7%, which halted trading, and the Chinese currency dropped in value.

What does this mean for the U.S.?

While the sharp U.S. market reaction is a surprise, slower Chinese growth has been an ongoing concern for investors. Similar fears in August 2015 prompted the first stock market correction in almost four years. In our view, stocks could drop further, but long-term investors should consider adding quality investments at lower prices. And bond prices have been rising as stocks fell, helping to stabilize portfolio values.

China matters more than in the past because it's the world's second-largest economy. But China is only part of the global picture, so keep in mind the following:

• U.S. economic growth is expected to continue near 2.5%, even if China slows further. In our view, the fundamentals, including earnings growth, support rising stock prices over time.

• Europe's manufacturing sector expanded in December, a positive sign for better economic and earnings growth overseas in 2016.

• Oil prices were flat as heightened tensions between Saudi Arabia and Iran offset the impacts of still-sluggish demand and high production.

• China's economy isn't contracting – but it's growing more slowly. China's stock market is speculative, and its decline doesn't reflect economic activity.
And remember, Chinese policymakers have indicated they will take actions to keep economic growth around 7%.

• Don't be surprised by more volatility in 2016 – there are many sources of uncertainty that may prompt sharp market moves. Be prepared so you aren't caught off guard.

What does this mean for you?

Stay focused on what you control – you can't control what happens in China or the market's reactions. Owning quality investments in a diversified portfolio with the appropriate mix of stocks and bonds can help you stay calm and invested. That way, you're still on track toward your long-term financial goals.