Global stock markets have had a difficult start this year. The slowdown in China, conflict in the Middle East and falling oil prices are only a few of the contributing factors. As advisors entrusted with managing client assets, we must be prepared to articulate our understanding of the current situation and discuss any strategies we might employ to help minimize their losses. It’s quite possible that some clients will need your help to calm their fears. In this post, I will share a few thoughts on the global situation.
To begin, our job is much more difficult when clients are inundated with media reports that a crisis is at hand. Let’s face it, fear sells (and increases ratings). In addition, during bull markets, stock prices tend to rise beyond a reasonable valuation and when a bear market manifests, stocks often overcorrect.
When stocks decline, why is the downside often so extreme? In the current situation, I believe there are two primary reasons. First, there is a legitimate interrelationship between the United States and foreign markets. Even though the U.S. economy is stronger than many other countries, several U.S. based multi-national companies derive a significant portion of their revenue outside the U.S. Thus, there is a contagion effect. This alone would argue for a correction that is in line with the relevant data. What would push stock prices to extreme lows? I believe it is fear; which is the second reason. Fearoften prompts an irrational over-reaction.