Starting off 2016 with the term “market rout” ought to remind investors of the importance of following sound and prudent investing rules. The China stock swoon led to some contagion in the United States as investors worried about the world’s second largest economy slowing. China’s worries are not necessarily ours since China accounts for just 7 percent of the U.S. exports representing less than 1 percent of our gross domestic product. Kiplinger’s expects the U.S. economy to expand by 2.7 percent this year while analysts’ consensus calls for U.S. company earnings to rise by approximately 6 percent in 2016. These are certainly not indicators for a bear market since recoveries increasingly occur during a reasonable period of time.
The global financial markets in 2015 were pulled between two opposing forces: The federal Reserve’s determination to raise interest rates as the U.S. job market strengthened, while at the same time there was pressure for lower interest rates in much of the world as China’s economic growth slowed and commodity prices, especially oil, sank. The results of this tug-of-war was a soaring dollar, lower junk bond prices even in the face of stubbornly low Treasury yields, and a volatile stock market that ended 2015 roughly where it started.
Market mayhem is particularly trying for retirees, so it is important to remember that the headlines about the stock market are not “about you.” Retirees are likely to have a healthy mix of bonds and cash in their accounts to temper these types of stock market declines. Even retirees should have an investment horizon long enough to weather this sort of storm since the retirement phase can last for decades, and since over time, stocks stand up to inflation better than bonds or cash, there should always be a “buy and hold” strategy of high quality stocks. Remember you have until Dec. 31 to take required minimum distributions from your retirement account if you are 70-1/2 or older, so plan your budget early in the year.
Speaking of your “healthy mix,” January is a perfect time to review your allocation for the upcoming year. The yield on the 10-year treasury bond has dropped to approximately 2.15 percent in the first week of 2016 and there are many dependable dividend paying stocks with impeccable balance sheets that have become cheaper as well. Volatility from China is the new normal, and the sooner we get used to it, the better equipped we will become at concentrating on the opportunities in the healthy domestic economy we are currently enjoying.
Foreign investment in our relatively secure economy has picked up a pace as evidenced by Chinese investors purchasing a record $8.6 billion in U.S. commercial real estate assets in 2015 -- including the Waldorf Astoria in New York City -- quadrupling its play in just one year.
Contact your trusted certified financial planner to review your current investment allocation along with your risk tolerance and email me your questions at email@example.com.
Barbara Magor Deel is a certified financial planner and a chartered financial consultant with EFS Generation Income Planning in La Vernia.