S&P 500 Correlation With China: Fear, Greed, And Panic

S&P 500 Correlation With China: Fear, Greed, And Panic

S&P 500 Correlation With China: Fear, Greed, And Panic by Ben Strubel, Strubel Investment Management

Dear Investors,

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The average investor underperforms the market by anywhere from 4% to 7% per year depending on the study you look at. Why? Well, they panic and sell stocks when they are down and tend to buy stocks when they are up, the exact opposite of what you want to do. In fact this past week I talked with a few clients and had to reassure them that things would be fine and for some more aggressive clients we put some cash to work and bought more stocks or sold some bond holdings and bought stocks. We took advantage of the 10% off sale on stocks. That’s something a good advisor can help clients do, stay the course prevent them from being part of the group of investors that underperforms by 4% or more.

Why am I so sure that now is a good time to buy stocks and there is nothing worth getting worried about?

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Here are some facts about the US economy. Considering the data below would you be a buyer or a seller of stocks, especially if stocks just went on a 10% off sale?

  • The latest ADP private sector jobs report showed the economy added 190,000 jobs
  • Q2 GDP was revised up to 3.7%
  • Annual auto sales reached almost 18M and are close to their pre-recession high
  • Unemployment has dropped to 5.5%

What about China? Well, the S&P 500 company’s only get 2% of their revenue from China as you can see in the graphic below.

It’s also worth noting that for the Information Technology sector the revenue figures above can be a bit misleading as computer and mobile phone component manufacturers their products to manufacturers in China who then sell the finished phone or computer to customers in the US or Europe. For example Intel will sell a processor to Chinese company Foxconn who assembles a Toshiba brand computer which is then sold to a US customer. Even though the end demand is in the US the sale gets marked as being to China.

In a recent conversation with a client about the stock market volatility I was asked how far down I thought the stock market might go. Well it’s always hard to guess the extent of people’s irrational panic but I think the lowest stocks may go is down another 5% (for a drop of around 15% or so in total).  By my rough back of the napkin calculation, at that point the stock market will be trading around its historical average price to earnings ratio and with a decent economy and strong corporate profits it would just be too hard for the traders to ignore how cheap stocks had gotten.

It’s also worth pointing out that a lot of the recent volatility is due to proliferation of ETFs. Rather than trading individual stocks many people (both professionals and amateurs) are moving in and out of ETFs (without getting too detailed, an ETF is basically just a basket of stocks). What I believe we are seeing is that in the short term, during times of stress, all stocks tend to move up and down together. In the past traders and investors would be looking at each company individually rather than buying or selling a whole basket of them.

For instance, one of our high quality holdings Lockheed Martin is a defense contractor that gets 0% of its revenue from China and will likely never get more than 0% of its revenue from China, yet it fell almost as much as the market during the panic selling days. Well traders were selling the S&P 500 ETF and Lockheed Martin is part of the S&P 500. Nonetheless our dividend portfolio did do well, fit actually finished August in positive territory for the year. So, safer less volatile dividend stocks on the whole do seem to still hold up better during downturns but perhaps not as much as they had in the past.

In summary I think we will continue to see a lot of volatility in the market until enough US economic data and enough corporate earnings roll in. I’d say a month or two should be enough for everyone to realize the China issues just aren’t going to have an effect on US and most other developed market stocks and more stocks to start recovering their losses.
As always I’m continuing to look out for anything that would be truly dangerous and we are taking advantage of some of the opportunities the recent volatility has brought by buying some stocks that have gone on sale such as Viacom (VIAB) and Twenty-First Century Fox (FOXA).

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No Company Profiled This Month.

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The Capital Appreciation Fund and the Dividend Fund are innovative, investor friendly alternative to traditional actively managed mutual funds called a Spoke Fund ®. We can also customize portfolios for clients seeking less risk and volatility by including allocations to other asset classes such as bonds and real estate.

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Historical results are not indicative of future performance. Positive returns are not guaranteed. Individual results will vary depending on market conditions and investing may cause capital loss.

The performance data presented prior to 2011:

  •  Represents a composite of all discretionary equity investments in accounts that have been open for at least one year. Any accounts open for less than one year are excluded from the composite performance shown. From time to time clients have made special requests that SIM hold securities in their account that are not included in SIMs recommended equity portfolio, those investments are excluded from the composite results shown.
  • Performance is calculated using a holding period return formula.
  • Reflect the deduction of a management fee of 1% of assets per year.
  • Reflect the reinvestment of capital gains and dividends.

Performance data presented for 2011 and after:

  • Represents the performance of the model portfolio that client accounts are linked too.
  • Reflect the deduction of management fees of 1% of assets per year.
  • Reflect the reinvestment of capital gains and dividends.

The S&P 500, used for comparison purposes may have a significantly different volatility than the portfolios used for the presentation of SIM’s composite returns.

The publication of this performance data is in no way a solicitation or offer to sell securities or investment advisory services.

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Ben Strubel earned a Master’s in Business Administration in Investment Management from Drexel University’s LeBow College of Business in Philadelphia, PA. He was inducted into the Beta Gamma Sigma honor society, the highest academic honor society for master’s degree students. While at Drexel, Mr. Strubel founded the LeBow Graduate Investment Management Club and the DragonFund Large-Cap Fund, which was responsible for investing $250,000 of Drexel University’s endowment. He also holds a Graduate Certificate in Financial Planning from Florida State University. He earned a B.S. in Information Technology from Rochester Institute of Technology in Rochester, NY. He teaches classes on finance and investing at Harrisburg Area Community College and for Manheim Township. Mr. Strubel also writes for several investing websites including Valuewalk.com and SeekingAlpha.com. He resides in Lancaster, PA.
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