It’s not hard to see why investors are intimidated by China’s slowing growth, currency devaluations and stock market woes. As China struggles to transition from an export-driven economy to a consumer-driven economy, we have seen the downturn’s global impact as it spills into to every major asset class.
My clients — from wealthy individuals to mid-sized institutions — have been calling me to ask what this means for their portfolios. Some of their favorite newspapers and television networks are questioning if we’re in the midst of a global stock market meltdown comparable to 2008.
While the year is certainly off to a tough start, I’m not losing any sleep. This is nothing like 2008. U.S. economic data puts us in a strong position relative to the rest of the world; headline GDP, inflation and employment numbers are, while not stellar, broadly positive and in line with consensus estimates. The absence to date of upward price pressure, particularly on wages, may give the Federal Reserve further pause before continuing to raise interest rates.
Growth has been challenging outside the U.S., particularly in emerging markets. Each country has its own unique set of challenges and opportunities, and we are continuing to see a divergence in growth and monetary policy. While the Fed has started raising rates in the U.S., Europe and Japan have been pouring on stimulus money in an attempt to spark growth. China’s central bank has devalued the country’s currency in an effort to stimulate consumer and service activity growth and move away from investment led growth. Of course, they also hope to stimulate their ability to export. Other emerging markets face economic challenges related to low oil prices, weak consumer demand, the strengthening U.S. dollar and other factors. In fact, my firm dialed down our exposure to emerging markets from 4 percent to 2 percent in the third quarter of last year, and then to zero at the beginning of this year.
It is important to note that not all news coming out of China is negative. While China’s gross domestic product has slowed to 6.9 percent (a number still in line with consensus estimates), much of the country’s stagnation is happening in industrial production and fixed investment. Retail sales and other consumer and service-related activity continue to grow in the double digits. So, while most news we hear on a daily basis is negative, it is important to remember that 6.9 percent growth is still healthy, just not as healthy as the Chinese government would hope. The end of the Chinese ‘supercycle’ doesn’t signal the end of the world or a global recession. So while U.S. markets may initially feel the impact of the China slowdown, we see prospects for continued U.S. growth.
So, what should investors do? Investors can limit their exposure to future shocks by diversifying their portfolios. Although diversification has not been a friend to investors in the past several years due to U.S. large-cap equities achieving outsized gains compared to just about everything else, we see the coming year as one in which to avoid excessive concentration in any one asset class.
Those who have already properly diversified portfolios should stay the course and not attempt to shift their allocations in anticipation of future market events. Timing the markets is difficult for even the most experienced professional investors, let alone for household investors who don’t have access to the same tools and information.
As is always the case, many of the events that will impact financial markets this year are unknown to us currently. Will this be the year when cyberterrorists hack Wall Street? Will an economic meltdown somewhere trigger a contagion of defaults elsewhere? Of course, unknown factors can be positive as well: a breakthrough innovation which unlocks new growth, perhaps, or an unexpected surge in consumer sentiment in the U.S. Only time will tell.
In the meantime, it isn’t hard to see why household investors are getting nervous about what all of this might mean for their hard-earned nest eggs. Understandably, many of these investors may lack the deep financial and economic expertise to contextualize the turbulence in the markets. So when they see headlines about a slowdown and possible recession in China, it’s natural to panic. We have guided clients through tougher days than these; we remain confident in the fundamentals of the U.S. economy and can rest peacefully at night.
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Why Investors Should Be Resting Easy originally appeared on usnews.com