The wild swings in U.S. stocks this week have tested the fortitude of even the most steadfast investors trying to follow the timeworn advice of not selling in a market rout.
Those who didn't panic when the Dow dived more than 10% over five punishing days of triple-digit losses were rewarded Wednesday when the index recovered a big chunk of those losses.
FOR THE RECORD
9:33 a.m.: An earlier version of this article stated that the Dow dived 13% over a five-day session. The decline was more than 10%.
Still, continued uncertainty could make businesses more reluctant to hire and investors fearful of diving back into stocks.
Darrell Spence, a senior economist with Los Angeles investment giant Capital Group Cos., said investors who held on were smart. He said a bright jobs picture, cheap oil and increased housing prices are fueling a robust U.S. economy.
Spence has spent 24 years with Capital Group, which has more than $1.4 trillion under management and is parent of the third-largest mutual fund family in the U.S., American Funds, owned by tens of millions Americans.
The company embraces a buy-and-hold strategy, focuses on quality companies and encourages a long-term approach to saving for retirement. This is an edited excerpt of a conversation with Spence.
The volatility in U.S. stocks has been blamed on a weakening of the Chinese economy. Do you agree?
You never know for sure what's causing the market to do what it's doing, but it seems events in China have created concerns about a slowdown there that might bleed through to other emerging market countries, or even developed countries like the U.S. and Europe. That seems to be what started the ball rolling on all of this. Time will tell whether it ends up being a legitimate concern or a passing concern.
How important is China's economic health to the U.S.?
The direct impact on the U.S., in my opinion, is not very large, but it could have a bigger impact on other parts of the world and eventually find its way back here. Keep in mind, Canada and Mexico are our biggest trading partners. North America accounts for one-third of all our exports. The U.S., unlike a lot of developed regions, exports a relatively small share of our economy and exports to China are only a small subset of that.
Should investors be worried?
We're human and it's natural to get worried and to run from something that frightens us. But at the end of the day, if the markets recover, economies recover and grow, you're going to miss out on what ultimately is the recovery. We could have had this exact same discussion in 2010 and 2011 and selling would have been the exact wrong thing to do. There are some bear markets that are really bad. I don't think this is going to end up being one of them.
Some say U.S. stocks are overpriced by historical measures. Do you agree?
I think they're priced fairly. Certain segments of the market could be considered cheap, others expensive. But in the aggregate, I think the U.S. equity market is fairly valued.
Would you encourage investors to buy U.S. stocks now?
I think any time is a good time to get into equities if you have a long-enough time frame to weather these shorter-term storms, it fits your goals and you have the ability to tolerate the volatility. With the markets down, there are more opportunities being presented to us. The simple rule is, it's better to buy them for a lower price than a higher price.
What conditions could drive the markets down further?
A very big geo-political event, an unexpected war. But more fundamentally, it would have to be a much greater deterioration of the economic outlook. It would have to be things deteriorate to the point that it really starts to hurt the world economy.
What would resume growth in the stock market?
Confidence is a big one. What would restore that confidence? Sometimes it's time. Sometimes it's data. You go through a couple months and go through the data and you realize things still look really good. Sometimes it's a policy change. I know people in our organization who follow China feel further stimulus is to come. Those are generally the types of things that restore economic confidence and get markets turned around.
If investors don't have the stomach for all the volatility, are there better options, such as bonds?
If one of your goals is to minimize volatility, then bonds are a great way to do that. Will bonds go down when interest rates go up? Yeah, they will. But they'll go down a lot less than stocks have the potential to fall. It's very difficult to lose money in bonds over a multi-year time period.
What do you expect to see the rest of the year?
I don't know if equities go up a lot from here, because I think equities are fairly valued. I think the market will stabilize as people start to regain confidence that the wheels are not falling off the U.S. economy. There's a lot to be positive about. In the U.S., it's a consumer that's healthy, a job market that's actually quite robust, household debt-to-income ratio is down, home prices are up. That data are what drive my decision-making, and it's quite good.
Could the stock market losses affect the Fed's decision on whether to raise rates?
I'm not on the Fed board; it's hard to talk for them. The very simple rule in my mind is the only way that this will affect them is if they think it has a big impact on the U.S. economy or inflation. Based on their comments so far, it doesn't seem like they really think this is going to have a very big impact. So I believe that whatever trajectory they were on, they will remain on.