Advisor: Stock market drop likely normal


By Terri Flagg - tflagg@civitasmedia.com



Amidst alarming broadcasts about the recent stock market drop, the hashtag #volatility bouncing around social media and a phone ringing with concerned clients, a Mount Airy investment consultant remained calmly at work in his Renfro Street office Tuesday.

John Moore, informed by research from his head office at LPL Financial as well as his own years of experience, does not think the recent market downturn signals the start of a recession.

“It’s a normal correction,” said Moore, explaining that correction in this context means a ten percent drop and that the market had already begun to recover. The Dow Jones finished more than 200 points lower Tuesday, following a 588-point drop on Monday. Since a modest gain on Monday, Aug. 17, the down has fallen more than 1,600 points.

The research from LPL Financial included a letter sent to clients that detailed the firm’s position.

In a weekly commentary published Aug. 24, John J. Canally, chief economic strategist for LPL financial, wrote, “the excesses that have triggered recessions in the past are not present,” and barring certain unforeseen events, “the risk of recession in the next 12 months is very low (4 percent) but not zero.”

According to the research from the firm, news of China’s stock market dropping spooked investors last week.

“People trade on emotion,” Moore said. “That’s what makes my job tough.”

Heightening that emotion may be the fact that the U.S. market hasn’t experienced a notable correction since 2011, making this one seem that much more alarming.

Set the fear aside, and the research reveals that while China’s market growth has slowed, it’s still growing.

“They still predict 7 percent growth, compared to 10, 11 or 12 percent,” Moore said. While that’s a significant drop, which the high rates were unsustainable, and it in itself was a normal correction.

But perhaps more importantly, the LPL Financial leaders claim that China’s stock market does not have a significant impact on the U.S. economy.

“Earnings drives the market, and U.S. companies are still earning,” Moore said. “But it makes people nervous.”

Especially during an economically speaking slow news period.

Without legitimate economic indicators such as the August jobs report, which won’t be available until Sept. 4, and a Kansas City Fed conference starting Friday that “usually provided insight into monetary policy” but won’t be attended by a key leader, news such as China’s market drop may continue to have an emotional impact.

Moore explained that the company’s approach is not only is the correction normal, “they (corrections) give you an opportunity to reinvest,” which reinvigorates the market.

When emotion is involved, people tend to sell after a drop such as this recent one.

“They don’t feel comfortable until it’s back up,” he said, which means those types of investors following that pattern are selling low and buying high — the opposite of the ideal — and missing the opportunity to “buy the dip.”

“People who wanted to sell got hit pretty hard,” he said.

Other indicators that have worried investors are low oil prices and the possibility of an increase interest rate from the Federal Reserve, although LPL Financial researchers do not believe those factors will contribute to or signal a recession and that the market will continue to grow in 2015, making its current volatility an opportunity.

“It’s a different market,” Moore said. “This isn’t another Lehman Brothers moment,” he said of that firm’s 2008 bankruptcy, which played a role in the recession that started that year.

Terri Flagg can be reached at tflagg@civitasmedia.com.

By Terri Flagg

tflagg@civitasmedia.com

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