Here's Your Wake-Up Call
As China catches a cold, Wall street sneezes, and investors look warily ahead
The home front. The biggest threat to stocks now could be housing. Rising mortgage default rates—particularly in the subprime market that caters to borrowers with poor credit histories—are a major concern for the consumer economy. Lenders are starting to tighten their credit standards, which could have a further negative economic impact. Acting as a counterweight, though, the flight to quality by investors pouring into government bonds has sent long-term bond yields lower. That is likely to reduce mortgage interest rates once again and give homeowners a little breathing room.
Demand for homes is also a mixed bag. While new-home sales plummeted by nearly 17 percent in January, sales of existing homes that month hit a seven-month high amid slumping prices. The housing outlook may stay murky for months, Paulsen says.
So, how to react as an investor? Prepare for a rocky road, but don't deviate much from your long-term plan, most experts advise. And brace yourself for volatility, says Sam Stovall, chief investment strategist for Standard & Poor's. Stovall says that, since 1959, market volatility has risen by 33 percent on average in the year following dramatic, single-day sell-offs of more than 2 percent, like last Tuesday's.
Financial planners suggest investing in high-quality stocks, such as shares of large, dividend-paying companies. And take the time to rethink your appetite for risk. You should have no more than roughly a quarter of your stock holdings in foreign equities, with only 15 percent of that in emerging markets, says investment adviser Ron Rogé, chairman of R.W. Rogé & Co. in Bohemia, N.Y.
For his part, Wells Capital's Paulsen remains hopeful. "If you just step back, all we've really done over the past few years is climb one wall of worry after another," he says. The market has had to deal with fears over rising oil prices, slowing economic growth and corporate profits, growing inflationary pressures, and ongoing geopolitical concerns. Yet through it all, stock prices have edged higher.
Last week's sell-off may prove to be just another wall of worry. Investors will need to climb over this one, too.
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