Volatility is Back

by / Tuesday, 25 August 2015

Shanghai Roller Coaster

China has been creating “investor angst” recently. The Shanghai Composite Index has been on a wild roller coaster ride and some investors just assume that what is bad for China is bad for the rest of the world.

After hitting a high of 5,166 in mid-June, the Shanghai Composite Index has gone on a two month binge of volatility, eventually hitting 2,964 on August 24th, down 42% from its high.

The Shanghai jitters eventually spread to other equity markets throughout the world, finally reaching our markets last week. Beginning Wednesday, the 19th, the Dow Jones Industrial Average experienced four very bad days, declining almost 10% through Monday, the 24th. Weeks like that can make investors begin to worry that we are about to experience another 2008/2009.

Here’s why we DO NOT expect another 2008/2009:

  • The banking system was very fragile in 2008… not so much today.
  • In 2008, billions of dollars of sub-prime mortgages were about to implode in accounts all over the world… not the case today.
  • Individuals AND governments were ridiculously over-leveraged in 2008… not today.
  • Our economy today is growing (albeit very slowly). Unemployment continues to decline, home construction is very strong and auto sales are extremely healthy.

Let’s face it. Our stock markets have been on a 6-year rally and a little profit taking should be expected.

At BCWM, we see market sell-offs as opportunities to invest in good companies at lower prices. Unlike 2008, we are not of the mind to get out of the stock market. Having said that, we are taking advantage of market “up days” to place small hedges in our equity portfolios.