Texas Tech University

Financial Experts Discuss Complexities of Stock Market Activity,

George Watson and Heidi Toth

August 25, 2015

Texas Tech experts advise that the rise and fall of the markets has several mitigating factors and that investors need to remain patient.

Uncertainty in the Chinese economy sent markets around the world into a panic on Monday. The Dow Jones industrial average dropped almost 1,100 points in the first six minutes of trading on Monday, roared back and fell again, finishing down 588 points (3.6 percent). China took steps to quell fears by cutting interest rates, and though the main Shanghai market fell more than 7 percent in initial trading on Tuesday, the Dow surged up 350 points at the opening bell. European stock also rebounded, up 3 percent in London and 4 percent in Paris and Frankfurt.

The market volatility has many investors nervous about their portfolios, whether it's Individual Retirement Accounts (IRA) or 401k retirement packages. But experts at Texas Tech advise that the rise and fall of the markets has several mitigating factors and that investors need to remain patient.

Jeffrey Mercer, Wylie and Elizabeth Briscoe Chair in Finance and Director of the Institute for Banking and Financial Studies, Rawls College of Business (806) 834-3655 or jeffrey.mercer@ttu.edu

Harold Evensky, professor of practice, Department of Personal Financial Planning, Texas Tech University and co-chairman of Evensky & Katz/Foldes Financial Wealth Management, (806) 392-2525 or harold@ek-ff.com

Michael Finke, professor, Department of Personal Financial Planning, Texas Tech University, (806) 534-6724 or michael.finke@ttu.edu (not available until Wednesday)


Jeffrey Mercer

  • In addition to his work in the Finance Department of the Rawls College of Business, Mercer also manages the Student Managed Investment Fund where 20 students each semester act as stock analysts and investment managers watching over a near-$3 million portfolio that supports professorships and scholarships at the Rawls College of Business.
  • Mercer said there has recently been a significant flow of information about major factors that drive security prices, plus the U.S. Federal Reserve Governors have been extremely inconsistent in their public messages to the markets about future policy, leading to further uncertainty.
  • China's actions to devalue its currency has complicated a delicate balance in currency markets and international trade, according to Mercer. That creates further uncertainty.
  • Mercer added when you couple significant market uncertainty with questionable economic growth, it takes only a few sizable sell orders to begin a cascade of trading that triggers more sell orders from the algorithms almost all institutional traders rely upon.
  • “Volatility in financial markets is a result of market participants' uncertainty, and a divergence of opinions, about information that is being revealed and what that information tells us about the future. For example, the central banks around the world continue a ‘race to the bottom' in the sense they feel the need to continue to coddle market participants via easy money and low interest rates.”
  • “Another factor is the increasing likelihood of a slowdown in economic activity and the buildup of debt in China and other major global economies. Over one-half of the global gross domestic product (GDP) growth, including China, Japan and significant portions of the Eurozone, is essentially flat, especially when you take into account the increasing use of debt to prop spending.”

Harold Evensky

  • Evensky is a certified financial planner, a member of the Committee for the Fiduciary Standard and S&P Index Advisory Board and research columnist for the Journal of Financial Planning. He has been chairman of the CFP Board of Governors, the International CFP Council and TIAA-CREF Institute Investment Advisory Board, IAFP National Board and has been published in multiple financial planning journals, in addition to authoring “Wealth Management” and co-authoring “The New Wealth Management” and “The Investment Think Tank and retirement Income Revisited.” He recently was named to Investment Advisor's 35 for 35 list along with Ben Bernanke and Warren Buffett.
  • Evensky's firm sent out a letter to its clients Monday advising them that investment decisions should be based on long-term returns, not short-term views.
  • Financial media frequently looks for a scapegoat – Greece last month, Ebola last year. This year it's China. The important factor to remember is markets frequently face uncertainty and shift as new information comes out, but in the long run market fundamentals reign. A diversified portfolio plus judicious rebalancing as needed likely will lead to greater returns in the future.
  • After an extended bull run, which the U.S. markets have seen, stock markets normally experience intra-year declines in the 5-10 percent range, with average recoveries of a few months. That means investors, particularly well-diversified investors, who do not need their money in the next few months to two years should have plenty of time to recover from this dip.

Michael Finke

  • Finke researches retirement income planning, risk tolerance assessment and behavioral personal finance. He was named to Investment Advisor IA25 in 2013 and Investment News' Power 20 in 2012 and has earned a number of awards including the 2011 Academic Thought Leadership Award from the Retirement Management Journals and 2010 winner of the iOMe National Retirement Challenge.
  • His research shows elderly investors tend to be more vulnerable to overreacting to a down market by selling stocks that then rebound. Decreased cognitive ability and fear of losing money can lead to more emotional responses. An elderly person who has full cognition is not likely to make the same mistakes in investing, meaning emotion cannot play a role in smart investing.
  • Holding investment managers to a fiduciary standard, which requires them to make the needs of their client the top priority, would lead to more optimal investments during bull and bear markets, but would be especially beneficial during a decline.
  • “Loss aversion and sentiment are closely related during a market decline as they both shift investor focus to recent poor performance and lead to trading decisions motivated by a desire to minimize the effects of current period losses.”
  • “Advisers who are paid more when consumers follow their biases will have little incentive to suggest following a more product, long-term investment strategy.

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