With the 24-hour news cycle, all of you are probably aware of the ongoing correction in stocks (meaning down over 10%), and increased volatility, as the summer draws to a close. What’s going on? Weakness in China has led it to decouple its currency, the Yuan, from the U.S. Dollar. It also has allowed its currency to depreciate compared to the U.S. Dollar and other currencies to help its export sectors. You can see from the first chart how strong the Chinese currency has been over the last decade. Evidently, it has become too strong and weakened its export-focused economy too much for the leaders’ likings. In all likelihood it will manage its currency even lower in the year to come. But, Chinese leaders will pull out all the stops to keep the economy growing to absorb a growing workforce. So weakness shouldn’t be extrapolated to a major economic contraction in our view. We think the Federal Reserve will also delay hiking interest rates in September and this should cheer investors in the coming days.
Let’s keep things in perspective. The second chart shows how subdued volatility has been over the last couple of years. It also shows that it has been a few years, in fact four years, without a meaningful correction in stocks. We were due for a correction in stocks. Where do stocks bottom? We really don’t know and no one else does either. So far, the Dow Jones Industrials are down about 10% for the year while the S&P 500 is down about 7%, both excluding dividends. Another thing to remember, while 500 points on the Dow seems like a big number and would have been a market crash in 1987 (meaning down over 20%), today it is about 3%. Short-term results like this are well within the range of what should be expected from time to time.
What is our strategy? First, we have been at this long enough to know panicking will cost you money in the long run. Second, this pullback has made some companies we have on our target list more attractive in our opinion. So, we plan to stay focused on buying high quality companies at a discount to their intrinsic value rather than trying to time the market.
We encourage you to keep in mind, as long-term investors patience is your best friend. As always, your situation is unique and you may have liquidity needs of which we are not aware. Please do not hesitate to contact us if you have any questions or would like to meet to go over your portfolio.