Here we are in the first market crisis of 2015. Stocks are under big pressure following the collapse of commodities, exacerbated by concerns over China and Federal Reserve policy. Bulletproof stocks have joined the downward parade that has steamrolled everything, including those names with great earnings and guidance.
Sure, the broader indices are attempting to stage recoveries, but the pain has already been dished out.
I actually find it quite amazing how one day a company can the king of the world, only to be treated as cold as ice the next day. The short-term short-sightedness of the stock market has resulted in many investors taking so many losses in great stocks simply because the trading mentality of Wall Street has turned investing into teenage fashion — hip one week and completely out of style the next.
As had been expected, the global markets slid dramatically on Monday as all eyes were on China. The government failed to step up to the plate, and while government intervention was never supposed to play a role in free markets (hence the term “free”), once the meddling began, so did a form of addiction.
But there are other market truisms that even the communist overlords of central-planned capitalism are learning the hard way: Selling begets selling, and panic selling begets panic selling. In such cases, it’s best to let the dust settle where it may.
At this point, China has shelved its dreams of the yuan replacing the dollar and shifted its focus to exports rather than a consumer-driven economy. From here, the country needs to do something massive. China’s market is now negative for the year, and the gains made over the past 14 months are at risk.
What this all means for the U.S. Federal Reserve is unknown, but what is known is that they must communicate no rate hike or risk overplaying the psychological game with investors.
Stay the Course With Stocks
As the re-pricing of U.S. stocks continues, it’s important to understand that this doesn’t mean these levels are some kind of fair value. We weren’t looking at overvaluation associated with traditional excess. We were in an old and hated bull market that was led by stocks with global sales.
I’ve noted in the past that the idea of one climactic selloff is misplaced. Remember, capitulation doesn’t happen overnight — it occurs over a period of time.
Yes, these wild swings are off-putting, but if you’re a part owner of great companies with solid fundamentals, you shouldn’t feel the need to panic. As a long-term investor, the best thing you can do is stay calm and stay focused on the potential that these companies represent. Plus, don’t forget that these selloffs create bargain buying opportunities, so heading for the sidelines could cause you to miss out on growing your wealth.
Individual American companies that have redefined the way humans live and interact are anything but dead. There’s no doubt that stocks can get ahead of themselves, and good companies can have overbought shares just as bad companies can have oversold shares. But that said, I would rather have the former than the latter. When shares of those great companies begin to pull back, I begin to salivate. But since we all like sleeping well at night, we need to make sure we don’t sate that salivation by forcing our buying activity.
In the end, I think Monday’s open was a flash crash and the rest of the session was angst — not just over economies’ valuations and central bank planning, but the system itself. On the New York Stock Exchange, 151 stocks advanced, 3,075 declined and only three touched new 52-week highs while 1,230 hit new lows. On the NASDAQ, the score was 265 to 2,501 (advance to decline), with 11 new highs against 688 lows.
That’s why I continue to believe in owning individual companies that are heavily discounted and growing margins, and that have great pipelines and great management. The shenanigans in China don’t alter that strategy much.
Remember, this isn’t about picking bottoms or timing the market. It’s about seizing the opportunities as they present themselves.
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