Yesterday saw what can only be described as a precipitous drop in the stock markets:  The Dow dropped by over 400 points, and the S&P fell to its lowest point for the year.  With markets already reeling and battered by bad news, it can feel like we are going through another 2008.  While there are many reasons to worry, there are also reasons to think that this will be a soft patch, and a temporary setback rather than another crash:

  • China is still experiencing an economic slowdown. Their stock market is selling off more than ours. The central bank has had its foot on the brakes for almost two years now, and the effects have successfully slowed the economy and controlled inflation. They should be changing direction soon. Such a change would also weaken their currency and help their export businesses.
  • The European Union is going through a sovereign debt/default scenario. Greece seems likely to default soon. The European Union hopes to keep the effects of a default limited, and to prevent any further defaults. These problems may be potentially disastrous for many European banks.  However there may very well be a bank bailout soon, most likely something similar to a TARP program employed in the US, where the European Central Bank or a similar entity buys the "toxic assets" from the banks. This helps the banks' balance sheets.
  • The US deficit reduction stalemate continues, and our stock markets are sending a clear message to stop the political shenanigans and resolve the issue. This current stock market sell-off should put extra pressure on Washington to clear up the tax and regulation uncertainties that are keeping American businesses from moving forward.
  • We feel that the negativity of the market’s reaction to the Federal Reserve’s “Operation Twist” plan to purchase long-term and sell short-term Treasury bonds was overdone.  Should there be positive results from this program, stocks may rally.

Client portfolios may be going down in value at the moment, however, we believe that things will return to growth and that this downturn will ultimately lead to buying opportunities for prudent and careful investors.  All the same, we are being cautious and careful.  We have been making changes to our portfolios and will continue to adjust as market conditions evolve.