We’ve been getting a lot of inquiries lately regarding the market’s unusually volatile start to 2016.
My response is simple. Stay calm and stay the course. Here’s why.
The factors that seemed to have provoked the latest selloff – fears of a China slowdown and various geopolitical
crises – haven’t fundamentally changed the overall investment landscape. Yes, China growth is moderating but this is
not news. It is to be expected as China transitions from a capital-intensive infrastructure-driven economy to a more
consumer- and service-oriented economy. And we will always have geopolitical crises of one stripe or another, but
history has shown that the majority of these crises have little to no impact on the long-term performance of our
markets.
History has a lot to teach us. As you may know, I have been an analyst since 1970 – more than 45 years! I believe this
experience gives me a perspective that is different than most investment professionals. Over the course of my career,
I have witnessed numerous bear markets, corrections, flash crashes, etc. I’ve probably lived – and invested – through
every form of down market except one caused by a major depression, though we came close in 2007-09. For
instance:
• 1973-74 A Middle East crisis drove oil prices sharply higher, kicking off a lengthy recession
• 1980-82 The Fed raised interest rates to 20%, pushing the economy into recession
• 1987 Computerized “program trading” strategies flooded the market, resulting in the Black Monday crash
on October 19
• 2000-02 The dot-com bubble burst
• 2007-09 The burst of the housing bubble set off a chain reaction that exposed major structural cracks in the
financial system. The credit crunch that followed turned a downturn into the worst recession in 80 years.
Ron Baron: The Market Selloff Is Unprovoked
January 29, 2016
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You may have been an analyst for 40 plus years but we are seeing fundamental changes unlike any before. I know you'll say that the old line, "this time is different," but it is. America more and more has seen a change in its culture, values, attitudes and beliefs. We are seeing a shift towards embracing socialism and the rise of the entitlement culture. We were warned about this by the Founding Fathers, philosophers and historians. The Middle Class is becoming an endangered species. Globalization on a historic scale, has fundamentally changed the landscape, causing massive disruptions on Main street. "Funny money" policies by the central banks, led by the Fed have caused monetary dysfunction and an increase in risk world-wide. The Chinese, "the men behind the curtain," for so long are showing that there are limits to their "magic" manipulations. I am an optimist by nature, on Wall Street for 36 years. There are disturbing currents that no one alive has ever seen. Cash could very well be a strategic asset.