Right now, the stock market is in decline and has been for the past week since it hit it's peak of 17,720.98 on the December 29th, 2015. Since then a lot has happened, Saudi Arabia and Iran are facing their highest tensions in years, the Chinese stock market fell 7% in the first 15 minutes of trading on Monday and continues to decline, and OPEC continues to pump out oil production at the highest rates ever, even in a congested market!
The DJIA right now (as of this writing) is at 16,578. So stocks haven't recovered yet and it could take a month, if not more, before they rebound and normalize again. This is a great lesson in psychology, not so much out of a fearful sort of psychology in people's minds, but of great awareness of their environment (stocks). I am neglected going into detail about the fed rate hike because it frankly is minimal that it has not had an impact on stocks.
First, let's look at why stocks are on the decline here in the U.S.
-As previously mentioned, China. Chinese exports are slowing dramatically as world growth is likewise slowing, having the second largest economy in the world, China makes a huge presence on the world stage, especially when you take into account their manufacturing and heavy industry sectors which are by far the largest in world, producing everything from concrete and copper to IPhones and DVD's.
But.... it's important to note that their stock market (the Shanghai Stock Exchange), is NOT a critical component of their economy, nor is it anything more than an indication of how part of their economy is doing based upon highly speculative trading. This is also NOT how U.S. stock exchanges, specifically the Dow Jones Industrial Average operates. The reason for the differences between the U.S. stock exchange and the Chinese, is that our stock exchange is much more robust and developed, it includes the health and wealth of nearly every large company in the U.S. and every one that has gone public, and with the interconnectivity of our finances and how tied-in our retirement plans such as our 401k's are to our utility of life, everything that happens in the stock market is of some value to someone somewhere, whether or not they think it matters at all.
In China, their stock exchange is not fully developed, not well connected, and their people simply couldn't care less, mostly because it is foreign to them as in it bears no brunt or effect on their daily lives. There are not nearly as many companies listed as in the U.S. and many of them have little foreign investment, even then a lot of them see highly subsidized contracts and help from the Chinese government, and even then their stocks and financial health are not directly linked to Chinese economic performance.
In conclusion to this piece; the Chinese stock market (Shanghai Exchange) is not important, we need not worry about it unless you are directly invested through it. It does not represent the health of the Chinese economy the same way the Dow Jones Industrial Average represents the health of the U.S. economy. So the investors that are freaked out about the Chinese drop in stocks probably already know this, but stocks are about speculation and spatial awareness so they are doing their good-duty of playing it cautionary and pulling out of U.S. companies who have direct links to Chinese manufacturing and investment. It's a safe, but unnecessary strategy.
Were going to look into what we can do as investors here in the U.S. to combat the contagion of fear and also were going to see what we can do to capitalize on the most recent series of events.
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GENERAL RULES TO LIVE BY AS AN INVESTOR IN A DOWN MARKET
1. Sit on it, and wait for stocks to rebound and normalize. It might take a week or a year, but they will rebound unless there is something catastrophic, or a series of catastrophes in a specific market you are invested in. Otherwise, just wait it out and use this time as an opportunity to direct your funds typically used for investing in stocks, into debt repayment. Now is a great time to put extra cash down towards repaying your student loans, credit card debt, home equity loans, car payments, etc. The biggest mistake I see from investors is fear and panic, don't be like them it's just a dumb, bad strategy to have.
Let's take a look at some stocks and see what's going on, and what industries have been affected the most.
CHSCP is currently trading at $30.60 with no movement for the day, down from their previous high this week of 30.91. The past week has seen a lot of volatility much like Tesla Motors (TSLA) but to a smaller degree, overall this would be a fun stock to watch. TSLA has seen a steady decline from $233 five days ago to $213 now, with a lot of volatility mixed in. McDonalds (MCD) has been all over the place, their last peak was two days ago with $119, then dropped to $115 and now they're at $116, however if you had held this stock for anymore than a year you would have seen the stock shoot from $93 to it's current $116. That's a fantastic return if you're a long-term investor, and one year is hardly long-term. What about Google? They were $750 five days ago and now down to $717. Their 52 week low is $486, and the 52 week high is $779... ridiculous returns on such a pricey stock!
Pretty much everything is down today. Every sector, industry, everything is down. Bad day for stockholders overall, but even in such a case stocks will rebound and within the market there are some gainers.
2. Short stocks. Shorting is not for everyone and takes a greater understanding of the markets and stock fundamentals then normal stock trading. If you're going to short, you had better be sure that your stock is indeed failing, or have some sort of insurance or hedge against it as most folks will do. In order to short, you must have extra cash laying around that you can put down in case things go bad, because you will need it for the broker depending on the outcome of the short.
3. Continue investing in specific companies through intensive research. This is the riskiest move to make in a down market and only for those investors who are willing to put in the time and research involved in making such a move. You can find gainers in the markets and jump in with the trend and hope the momentum will continue (risky) or go ahead and see if your research leads you to a company that is about to break from the herd and realize some gains.
Take today for example, the best performing stock was that of NGL Energy Partners (NGL) whose stock soared over 45%! But why? If you're thinking it had something to do with the commodities industry or the energy sector you would be wrong. Instead, they sold one of their assets for $350 million, in a move that apparently shook investors the right way. Meanwhile, the rest of the energy sector was mostly meh, not going anywhere and those that did went down. There were a few exceptions like Kinder Morgan (KMI) and others but most every sector overall was down significantly.
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