this Oct. 15, 2014 file photo, specialists Robert Tuccillo,
left, and Frank Masiello work on the floor of the New York
Stock Exchange. The biggest stock slump in more than two
years is no reason to abandon the market, professional
investors and strategists say.
NEW YORK —
After more than five years of stock market gains, investors could
be forgiven for worrying that big sell-offs may be the harbingers
of bigger slumps.
But, even as
stocks were plunging last week, strategists and professional
investors were telling their clients that the volatility was no
reason to abandon the market.
Worries about a
slowdown in global growth drove oil prices and global stock
indices sharply lower. Headlines about the spread of Ebola and the
deepening conflict with Islamic State fighters in the Middle East
also turned investors cautious.
investment strategists pointed out that the key factors supporting
stocks during their current bull run market remain in place. The
U.S. economy is still growing, and so are corporate earnings.
say investors should take advantage of the opportunities that come
with a stock sell-off.
the Standard & Poor's 500 stock index dropped as much as 7.4
percent from a recent record. Investors fled to the relative
safety of bonds, pushing up their prices and dropping the yield on
the 10-year Treasury note to its lowest level in more than a year.
deputy chief investment officer for Wells Fargo Private Bank, says
that big shifts in financial markets are a good time to change, or
rebalance, the proportion of stocks and bonds held by investors.
financial crisis and the Great Recession, many investors have
allocated too much of their portfolios to bonds, and shied away
from stocks, Davidson says.
That strategy has
served them well over the last seven years, as bonds have rallied.
The Barclays aggregate, a broad index of bonds, handed investors
positive returns every year since the financial crisis, with the
exception of 2013 when it gave investors a 2 percent loss.
The time may now
have come to put more money into stocks. Bonds could slump if the
economy continues to improve and interest rates start to rise from
suggesting that investors who have been on the sidelines use this
as an opportunity to get into the (stock) market," Davidson
The yield on the
benchmark 10-year Treasury note fell as low as 1.89 percent last
Wednesday as investors sold stocks heavily and bought bonds. They
are now trading around 2.22 percent.
the recent stock sell-off as a normal, periodic slump, rather than
the precursor to a market crash.
The stock market
hasn't had a correction, Wall Street speak for a drop of 10
percent or more, in more than three years, an unusually long
stretch. Many analysts consider the current volatility as a
natural part of stock investing. Typically, the stock market
experiences a slump every 18 months, on average, according to data
from S&P Capital IQ.
By Tuesday, the
likelihood of such a slump appeared to be fading as the S&P
500 jumped almost 2 percent, after encouraging news on the global
economy, and some strong corporate earnings. The index has risen
four straight days.
There are reasons
to remain cautious, though. Before jumping back into the stock
market, investors should look at developments in commodities, says
Jeff Kleintop, Charles Schwab's chief global investment
stock sell-off was driven by a fear that deflation, or falling
prices, could start in Europe and spread throughout the global
economy, says Kleintop. Lower prices might seem like a good thing,
but a sustained fall pushes consumers and companies to cut back on
their spending and wait for lower prices. It's a difficult cycle
to break and can devastate economies.
Oil's plunge this
year has stirred fears of deflation. Crude has dropped 26 percent
from $106.91 a barrel in June, to as low as $81.10 on Monday. For
that reason, investors should wait until they see oil stabilizes
before buying stocks.
"I want to
see commodity prices rise, before I believe that the stock market
rally is sustainable," says Klientop.
One other reason
to shift more to stocks, market watchers say, is that the recent
sell-off has made them relatively cheaper.
price-earnings ratio for companies in the S&P 500 index has
fallen from a high of 17.2 in June to 14.7. That's about where it
was in February. The P/E ratio measures how much investors pay for
stocks of companies in relation to next year's earnings.
view the stock sell-off as a "nuanced opportunity," not
an opening to rush into the market, says Russ Koesterich, chief
investment strategist at fund manager BlackRock. While valuations
are lower, stocks still aren't "particularly cheap."
that buying the stocks of larger U.S. companies is one of the
soundest strategies. That's because the U.S. economy will continue
to expand, although at a muted pace, and these stocks should offer
the best cushion should markets become volatile again.
CEO Jeff Immelt seemed to underscore that point on Friday after
the conglomerate posted strong third-quarter results. Immelt
acknowledged the uncertainty in the global economy, but said that
nations are still going ahead with large building projects and
companies are buying equipment.
GE also issued an
upbeat forecast for the fourth quarter, a crucial prediction
because GE is seen as a proxy for the global economy.
be selling out of stocks," Koesterich says. "You can
trim a bit if you're worried about volatility."
investors, the best strategy is simply to do nothing and wait out
Ron Wiener, CEO
of RDM Financial Group, an investment advisory firm that has
offices in Westport, Connecticut, and Boca Raton, Florida, says he
didn't sell any of his holdings during the recent slump.
He invests mainly
in U.S. companies. He also holds so called Master Limited
Partnerships, MLP's, which own pipelines, holding tanks and other
equipment that transport fuel to consumers. They have been popular
with investors in recent years because the firms are required by
law to "pass through" much of their income to
back in six or nine months, we're all going to wish we stayed
exactly where we were," Weiner says.