How to Face Challenging Markets

DEWITT, Mich. - June 1, 2016 - PRLog -- Are you finding today's market and economic news challenging and difficult to understand? Then you may need to make some adjustments to prepare for ongoing volatility and stay on track toward your long-term financial goals. While we don't think this volatility is likely to end soon, we believe the current pullback offers opportunities for investors.

Why Is Volatility Likely to Continue?

In our view, three important risks continue to trigger market pullbacks:

  1. China - Chinese policymakers are working to stabilize an economy shifting toward a greater reliance on consumption.

  2. Oil - Low oil prices should be positive for growth over time but have caused uncertainty in the short term.

  3. Interest Rates - The Federal Reserve plans to continue raising short-term interest rates, but rates in the rest of the world remain well below those of the U.S.

Is This Volatility the Beginning of Something Worse?

Although greater uncertainty can make investors nervous, we don't see a repeat of the Great Recession. Conditions today are very different from those in 2008, when the housing bubble burst and high debt levels led to bank bailouts and the financial crisis. Today, consumers have paid down their debts, banks are better capitalized, and the U.S. and global economies are growing.

More importantly, we think the fundamentals of economic and earnings growth remain mostly positive and should improve in 2016 if oil prices and the dollar stabilize as we expect. Economic growth and earnings growth drive rising stock prices over time, which is why we think the current pullback isn't likely to end the bull market.

According to Bloomberg, over the past 30 years, the average decline in stocks during each year has been 14%, which we reached in early February this year. However, the annual average return was 9.9% over that same time period, showing the value of staying invested and adding quality investments at lower prices during past pullbacks.

Will Slower Global Growth Cause a U.S. Recession?

We think a U.S. recession remains unlikely. Compared to many other countries, the size of the U.S. economy insulates us from the rest of the world. And recession worries are mainly due to the weakness in manufacturing, but this sector has slowed between recessions in the past. The strong dollar and the drop in oil prices have triggered the latest manufacturing slowdown, but we think both factors are likely to stabilize this year.

Consumer spending, which contributes about two-thirds of economic growth, has been modest throughout the six-year expansion. We think it will pick up a little as overall spending starts to benefit from falling gasoline and energy prices. In addition, consumer confidence remains high, dented only slightly in response to market headlines.

The auto industry is still reporting near-record sales, and housing industry indicators remain strong. This suggests that consumer spending will continue to be the backbone of this expansion, offsetting weak exports and business spending.

Keep in mind that global growth remains above 3%, which is not a recession. Efforts are under way to increase growth rates in Japan, Europe and China, and while it is taking longer than expected, we think growth will improve. Those moves should help to reduce the risk that slower growth in the rest of the world will drag down growth here.

How Can You Prepare for Ongoing Volatility?

We recommend five time-tested strategies to help you stay invested and take advantage of opportunities during continuing market volatility.

  1. Stick to the right mix. Your investment portfolio should have an appropriate mix of stocks and bonds based on your risk tolerance and long-term goals. Since stock and bond prices tend to move in opposite directions, owning both helps to stabilize your portfolio. You may need to rebalance to return to the mix of stocks and bonds that is appropriate for your long-term goals and time horizon, which may mean adding to some investments and selling others that now make up too much of your portfolio.

 2. Dollar-cost average. By investing a fixed amount at regular intervals, you can put market volatility to work for you. While dollar-cost averaging doesn't prevent a loss or guarantee a gain, it can help you buy more shares when prices are lower.

 3. Check your cash. Make sure you have enough cash to cover short-term expenses so that you aren't unexpectedly selling investments at lower prices and have the ability to buy, if appropriate.

 4. Review your portfolio's diversification. Small- and mid-cap stocks have dropped more than large-cap U.S. stocks. We think that using this pullback to add them, if appropriate, can help enhance portfolio diversification. International equity investments are also attractively valued.*

 5. Look for quality. When stocks drop together (as they've done since the beginning of 2016), little attention is paid to quality. Alert investors have the opportunity to identify and add quality investments at attractive prices.

Remember, volatility is a normal part of investing. Have confidence in your long-term strategy, and talk with your financial advisor to make sure you're prepared for market fluctuations this year and beyond.

Important Information:

* Small- and mid-cap stocks tend to be more volatile than large-cap stocks. Special risks are inherent to international investing, including those related to currency fluctuations and foreign political and economic events.