VOL. 130 | NO. 165 | Tuesday, August 25, 2015
Memphis Investment Professionals Preach Caution Amid Market Swings
By Andy Meek
The 1,000-point drop at one point Monday, Aug. 24, in the Dow Jones Industrial Average – it ended the day down 588 points to close at an 18-month low – was a result of volatile trading that marked a stomach-churning start to the week for investors.
It seemed, amid the worst of the selloff, there was no place to hide; seemingly high-flying tech stocks and stocks in quieter sectors of the economy alike both took a shellacking, as did plenty of other names. Even so, Memphis investment professionals have been returning to some key themes this week, whether they’re being confronted by panicked investors or just someone eager to know what exactly is going on, and why.
Among those themes: The U.S. economy is healthy, they say, with sound fundamentals belied by the recent market performance. Also, don’t panic. In fact, the ideal is to position a portfolio so that to some extent it’s able to handle gyrations like these.
And the market was likely due for an adjustment anyway, they add.
“The most important thing is don’t panic,” said Jason Lioon, principal and deputy chief investment officer with Diversified Trust. “Hopefully, everyone has portfolios positioned appropriately to withstand the unexpected.”
Days like these may feel jarring, but he described them as the normal movement of a market.
“This has happened many times historically,” he said. “It’s more important to keep your head about you and not do anything in a reactionary way. There’s still a lot of good things out there.”
Along those lines, Kelman-Lazarov Inc. co-founder Marty Kelman agreed that investor actions taken before this week are more important than actions taken in reaction to this week.
“What's most important is to have put yourself in position before today to withstand the urge to panic – keeping debt levels low, having a diversified portfolio that matches your risk tolerance based on your goals and objectives, and confirming your plan with a trusted friend, family member, or adviser,” he said. “Keep your long-term perspective in mind when investing in the stock market.”
Still, worries over China’s contracting economy have sent ripples far and wide. In his morning note on Tuesday, Chris Low – chief economist at FTN Financial, a division of First Tennessee Bank – noted that some Fed insiders are now less certain the central bank will hike rates as had been previously anticipated at its next meeting.
Along those lines, Lioon said the Fed is now confronted with something of a dilemma because of the recent news. It’s kept rates at near-zero for several years now, and it would like to come off that low point so there’s more room to cut rates in response to the next big crisis. But will the Fed risk raising rates in the face of a declining stock market?
“Two words come to mind that start with a ‘C’ – China and complacency,” said Mercer Capital president Matthew Crow. “Fundamentally, concerns about China's growth rate, and the corresponding impact on the global economy are starting to be born out by the data. Technically, this market has been unusually calm for an extended time, which is inherently unsustainable. Markets are never de-risked, even though sometimes risk is deferred. Hard to predict the week ahead, but there's nothing to suggest this will get sorted out in short order.”
Investment professionals – even some in Memphis – had for a few years now been touting China as not just the next hot growth market but also one rife with investment opportunities. The past few days’ news, though, has led to a re-examination of some investment assumptions, including of forecasts about how the rest of the year might play out.
Count Magna Bank chairman, president and CEO Kirk Bailey, though, among those who stress that domestic focus ought to return to the positives.
“Markets move on momentum, and clearly the recent evidence of weakness in China's economy has acted as the catalyst for people to exit equity holdings and move to cash, the current momentum in the marketplace,” Bailey said. “Fundamentals for U.S.-based small and mid-cap companies remain healthy, and these companies are not dependent on Chinese business. Hopefully, investors will refocus on the fundamental strength of U.S. businesses soon and invest in the stock of these companies.”
Indeed, says Lioon, the U.S. economy is still growing.
“We’re not really worried,” he said. “It doesn’t seem to us like a recession is imminent. The growth may just be a little slower than everyone had hoped it would be.”