By James Brumley, InvestorPlace Feature Writer If you’ve ever attempted to catch a knife with your bare hands, then you know what it’s like to jump into a plummeting stock. “Buy low, sell high,” they say, but nobody ever really knows if that day’s weakness is the definitive low point. Microsoft ( MSFT ), however,
Volatility is back – there’s no getting around it, and we’ve got ourselves a nice little 10% correction from earlier this year. Last week, we saw big intra-day swings in the markets across the globe, and yesterday, we saw more of the same, with the S&P 500 (NYSEARCA: SPY ) off nearly 3% at the end of the day and the international markets off further. (Of course, the US market was actually up last week, but who’s counting?) The past few weeks have struck many as a bit of a shock, in large part because it has been some time since we’ve had really any volatility in the markets at all. The VIX (S&P 500 volatility) has spiked back to levels we haven’t seen since late 2011: (click to enlarge) But we still pale in comparison to the huge swings in 2008 and 2009: (click to enlarge) The primary issue is that we got comfortable. Really comfortable. I talked about this earlier – when we were fat and happy and too cozy in our calm markets to be bothered to remember what markets do on a regular basis. I see the irony in my post: “I don’t know what the catalyst will be. More aggressive Fed tapering? Global unrest? An unseen recession? Political turmoil? War? Most likely it will be something none of us saw coming – that is how these things usually work out.” Last year, not too many people said that we’d be getting a correction because of fears of a Chinese economic slowdown or because the anticipated-for-five-years-now Fed rate hike was finally (maybe) coming around the corner. I certainly didn’t. The only thing you should be thinking with these kind of short-term corrections is “This is what stocks do.” Put it on a post-it on the bathroom mirror or on the back of your phone or the side of your monitor or wherever you need the reminder. Stocks go down! Sometimes they do it quickly (see November 2008-March 2009), and sometimes it takes quite a while (see 2000-2002). Sometimes they go down a little (do you even remember the decline in 2011?), and sometimes they go down a lot. Sometimes it’s because of a recession, and sometimes it’s not. Every time someone you’ve never heard of will get credit for “predicting it,” and every time someone who has been bearish for the last 20 years will revel in their brief vindication. Each and every time, you will have an opportunity to decide how you will respond. Are you going to stare at the market every day? Are you going to anchor on what your account value was three months ago and bemoan your “losses?” Are you going to find some market commentator who told you he saw this coming and now know exactly what you should do next? Here’s what you should probably do when stocks go down: Nothing. Boring advice, I know. But usually, you should do nothing. Sometimes there’s an opportunity to take some tax losses. Sometimes it will warrant rebalancing (though rarely upon a 10% correction, depending on your rebalancing rules). Most of the time, you’re going to do nothing. We’re not good at doing nothing (more on that later), but give it a try. Go outside or read a good book and tell yourself “This is what stocks do,” and do nothing.
Concerns regarding sluggish global growth have curbed the major benchmarks in recent times. Dismal manufacturing data out of China once again sent jitters in the global markets on Tuesday. Disappointing factory data in the Eurozone further dampened investor sentiment. On the other hand, recently released economic data showed that the U.S. economy has recovered significantly from the sluggish growth conditions in the first quarter. While others are struggling to stem the rout, the U.S. economy seems to be standing tall amid falling towers. In this situation, ETFs that have significant exposure to companies with a more domestic focus are likely to gain from improving fundamentals. China, Europe Suffering China The China Federation of Logistics and Purchasing reported on Tuesday that the official manufacturing PMI index declined to a three-year low in August to 49.7 from July’s reading of 50. Meanwhile, the final Caixin Manufacturing Purchasing Managers’ index fell from 47.8 in July to 47.3 in August, reaching its lowest level in the last 77 months. The reading below 50 signaled that manufacturing activity contracted in August. Moreover, a plunge of 8.3% in export and a decline of 8.1% in import in July indicated the world’s second biggest economy is suffering from both weak global and domestic demand. It was also reported that producer prices declined to the lowest level in six years in July. These disappointing data raised concerns that China may fail to achieve the target of 7% GDP growth rate this year. Europe Investors are also worried about the economic condition of Europe. The final reading of Markit’s manufacturing PMI came in at 52.3 in August, below July’s reading of 52.4. Though the reading of the index reached a 16-month high in Germany, the reading out of France and Italy declined to the lowest level in last four months. Meanwhile, the Markit/Cips UK manufacturing PMI declined from 51.9 in July to 51.5 in August, indicating a slowdown in manufacturing activity in the U.K. Meanwhile, it was also reported that the Eurozone’s inflation rate was at only 0.2% in August, significantly below the targeted rate of 2%. Last month, Eurostat reported that the common currency bloc expanded at a rate of only 0.3% in the second quarter, down from the first quarter’s growth rate of 0.4%. While the French economy remained stagnant in the second quarter following a 0.7% rise in the first, growth of only 0.2% in Italy came in below the first quarter’s growth rate of 0.3%. U.S. Outperforming Despite global growth coming to a grinding halt, the “second estimate” released by the U.S. Department of Commerce last month showed that the GDP in the second quarter advanced at a pace of 3.7%, significantly higher than the first quarter’s rise of only 0.6%. The report also showed that gross domestic purchases surged at a rate of 3.4% during the quarter compared to a gain of 2.5% in the first, indicating an increase in domestic demand. Also, the personal consumption expenditure (PCE) price index gained 1.5% during the quarter, a turnaround from the first quarter’s 1.9% decline. Meanwhile, job data released last month showed that labor market condition in the U.S. remained strong in July. While the U.S. economy created a total of 215,000 jobs in July, the unemployment rate remained unchanged from June’s seven-year low of 5.3%. Separately, the Commerce Department reported on Tuesday that construction spending gained 0.7% to a seasonally adjusted annual rate of $1.08 trillion, hitting its highest tally since May 2008. 3 ETFs to Buy Small-cap ETFs that are expected to have limited international exposure are believed to remain untouched by global growth concerns. Meanwhile, these domestically-focused ETFs are poised to benefit from the favorable economic environment in the U.S. Hence, we have highlighted three well-ranked small-cap growth ETFs that investors may find profitable in the current situation. PowerShares Russell 2000 Pure Growth ETF (NYSEARCA: PXSG ) This fund provides exposure across 310 securities by tracking the Russell 2000 Pure Growth Index. It is well diversified across its holdings with none of the companies accounting for more than 1.4% of total assets. Sector-wise, health care takes the top spot at 31.5%, while information technology and consumer discretionary take the next two positions. PXSG has amassed $31.3 million in its asset base while it sees light volume of around 2,947 shares a day. The ETF has 0.41% in expense ratio and has a Zacks ETF Rank #2 (Strong Buy) with a Medium risk outlook. The ETF returned 1.5% over the past one week. SPDR S&P 600 Small Cap Growth ETF (NYSEARCA: SLYG ) This fund follows the S&P SmallCap 600 Growth Index, holding 355 stocks in its portfolio. It is also well diversified across its holdings with none of the companies accounting for more than 1.3% of total assets. The ETF has been able to manage $544.2 million in its asset base and has a low traded volume of 20,249 shares per day. It has a Zacks ETF Rank #1 (Strong Buy) with a Medium risk outlook and charges 15 bps in annual fees and expenses. The product returned 1.4% over the past one week. Vanguard Small Cap Growth ETF (NYSEARCA: VBK ) This ETF provides exposure to 738 firms by tracking the CRSP US Small Cap Growth Index. The fund has amassed $4.47 billion in its asset base while it sees a moderate volume of around 188,000 shares a day. Only 5.4% of the fund’s assets were invested in the top 10 holdings. About 20.6% of its assets are allocated to the financial sector, which takes the top spot among other sectors. The ETF charges a fee of only 9 bps annually and has a Zacks ETF Rank #1 (Strong Buy) with a Medium risk outlook. It returned 0.3% in the past one week. Original Post