Saturday Morning's Wall Street Journal said it all, "Stock Plunge Picks up Speed". Fear led the market decline as the CBOE volatility index doubled. Our bruising week ended with the Dow Jones Industrial Average dropping a total of 10.1% from a high reached in May, SP500 down 7.5% from May record. We've hit a true correction in the DJIA index which is a decline of 10%. The market declines 10% a year on average, 15% every three years and 20% or more (true Bear) every five years. We have not experienced a correction since 2011 when the market fell due to the Standard and Poor's downgraded it's rating of US Debt. We have been expecting this correction for sometime and are over due for this normal occurrence. Of course, market declines, no matter how "correct" the correction, never feel good. We wonder if the sky is falling and in particular, if the sky over China's economy shows signs of significant slow down. According to the Wall Street Journal, China is a bit of black box because of their government tight controls make it difficult to know exactly what to expect from their economy. China has had a tremendous growth trajectory increasing at a rate of about 10% a year for about thirty years and most recently slowing down to 7% per Brian Wesbury an economist at First Trust. Another big concern is the federal reserve is expected to raise rates in September and how the strong dollar will impact big company earning reports due to a drag on exports. (Our goods are now more expensive with a stronger dollar).
Let's assume the worst with China's growth. What would happen if china's GDP measured in at 0%? Brian Wesbury, an economist at First Trust discussed raised the question in one of his latest video posts. He notes that we currently export .7% of our Gross Domestic Product (GDP) per year. Hence if China stopped growing and buying our imports our GDP would fall by only .7% to about a growth rate of 1.8% per year. He also notes that this would only be a one time hit against our growth number. He admits this is rudimentary economics. But the point still is valid. We do not need China to keep growing.
Our take, is market corrections are very normal and needed to keep a market healthy. When investor sentiment becomes to bullish we become prime candidates for a market bubble. We believe company fundamentals still indicate growth opportunity in US and Internationally. If you have "extra" funds to invest for the long term. This could be opportunity knocking!
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