The August correction in the Chinese stock market led to a lot of "how terrible" news coverage and speculation as to whether or not this signaled the end of the China growth story and how it would impact the US and global economies.
The origin of the recent stock market correction started earlier in the spring of this year. During the month of April, the Canadian, U.S. and many other global stock markets achieved new record highs.
It is not uncommon for an individual or organization, such as a charity or community tennis club, to consult a financial planner or investment advisor regarding investment returns that can be generated on some spare cash that is not needed in the immediate future.
Canadians, like many nationalities, have a home bias when it comes to investing. The majority, if not all of their investments, such as RRSPs, real estate, mutual funds, segregated funds and businesses, are in Canada and are tied to its future economic growth.
These Canadian investments could see reduced returns in the future, however, due to a growing shift in the balance of economic power towards China and the East and away from the U.S. and Western countries.
Sometimes during social events or other gatherings a person will approach someone in the financial services business with an opening question: “I hear you do investments. What kind of returns can I expect?” .
Quantitative Easing, otherwise referred to in the media as 'QE', refers to governments printing money out of thin air in order to stimulate economic growth. The US ended their program of QE in late 2014. The impression this left with many people was that the need for economic stimulus ended.
This also goes hand in hand with the media theme that U.S. consumers have been deleveraging by paying down household debt such as mortgages, credit cards, car loans etc. since the 2008 credit crises. The reality is much different than what is being portrayed in the mainstream media.
Human nature includes the desire to predict and or anticipate both the immediate and longer term future. The reason for doing so is often to eliminate or reduce the fear or anxiety about the unknown. Human beings detest uncertainty and will do almost anything to reduce this uncertainty.
In ancient times people made special offers to local gods. In modern times, people watch news broadcasts and try to interpret how current events will impact their investments.
During a recent client call, the topics discussed included how the media influence people's investment behaviors. This client woke up one day with an 'epiphany' thinking that a market correction was just around the corner. They did admit after a discussion that they had been reading something to that effect in the newspapers during the weekend.
As stock market indexes in Canada and the U.S. make new highs on an almost daily basis, as of late June and early July, many investors have expressed increasing anxiety about a possible 'correction'.
Media headlines and commentary on BNN speculating about a possible correction from these recent highs, following a strong run over the past year or more has added to this investor anxiety.
One Saturday, famed investment manager Peter Lynch was working at the office when he decided to answer the phone. The caller was a holder of his mutual fund who was calling to cash in the investment. Peter explained how he was excited about the growth prospects for the economy and his fund and asked him why. As Peter tells the story the caller said: 'Because I am breaking even!'
