"Kee" Points with Jim Kee, Ph.D.

Inevitable but not predictable. That’s the way I view sharp market sell-offs, particularly like the one we are currently experiencing. The US S&P 500 index is down 7% from its recent highs, and the Dow Jones Industrial Average is down 10%. Global markets have fared even worse, with the FTSE World ex-US (global stocks excluding the US) down about 15% from its highs, and emerging markets indices down a whopping 25% from September 2014 highs. Jeanie Wyatt, our founder and CEO, released a communiqué to our clients regarding the recent sell-off yesterday, but I decided to write down my own thoughts for this week’s Kee Points.

 

The main driver of the market’s downturn appears to be concerns over China’s slowing growth and its impact on global growth. I mentioned in prior Kee Points that my key take away from the yuan’s recent plunge was the confirmation of Chinese growth deceleration. Global growth continues to be weak, and I think even the US growth rate is being overestimated by most analysts. It is positive but weak, and while the US economy has much more influence on global growth than China (Federal Reserve), I think its safe to say the markets were pricing in a little more growth than what we are seeing in the data. We haven’t seen a full correction in US stock indices since 2011 (although many stocks in the S&P have pulled back at least that much), so the current downturn, though unpredictable, doesn’t come as a great surprise. I also mentioned in my portion of the beginning of the year webcast that China’s growth deceleration seems to be impacting emerging markets most adversely, and not just the commodity producers. We’ve certainly seen that over the past several quarters.

 

A key role for any financial advisor is to work with clients to stay with a well thought out plan. That’s not hard to do when markets are rising and it is absolutely critical in times like this when markets pullback. Maintaining a long-term view is absolutely critical to ensuring success in the long-run in common stock investing. Short-term thinking, which involves actively buying and selling during market downturns and volatility, has been shown time and again to almost ensure that long-term goals won’t be met.

 

As I look across the financial headlines, a few thoughts immediately come to mind. Specifically, I would not be investing in stocks if I thought:

 

That success depended upon there being no pullbacks, corrections, bear markets, or recessions. These are constants that occur regularly as far back as we have data.

 

That success depended upon predicting pullbacks, corrections, bear markets, and recessions. Proven success lies in the ability to stick with a well diversified portfolio throughout these occurrences.

 

I certainly wouldn’t be invested if I thought the whole thing was predicated on monetary or fiscal stimulus put forth by the Chinese government.

 

That’s how to view the forest, but sometimes it is helpful during tense times to look at the trees, meaning individual companies. Our clients are invested in actual companies producing and selling products and generating positive cash flows. Kee Points is typically not a forum for discussing individual stocks, but I’ll take just one example from our portfolio, Wabtec (Westinghouse Air Brake Technologies Corporation). This is a firm that makes safety components like signaling and braking systems for transportation systems (rail, freight, ports) worldwide. These components aren’t discretionary purchases but rather required maintenance capex (capital expenditures) for much of how the world gets around. Wabtec’s markets are growing and are expected to grow for years to come. That’s a real investment, not a short-term speculative trade. And the same holds true for a variety of companies we invest in, covering everything from groceries to antibiotics to digital imaging equipment. So I would encourage you to do as I do during market downturns. Take a look at STMM’s Year End Book from time to time, which contains brief, informative write-ups of the wealth creating companies that you own. Hopefully this will help you “lift your gaze” and maintain a longer-term investors view. That’s what I do!