Today's Market Action: S&P 500 and Dow more than down 3%
Just a short note to discuss today’s market action. Both the S&P 500 and the Dow Jones Industrial Average were down more than 3% on the day bringing the 2 day return to -5%. We have not seen this kind of market volatility for several years. In fact, the Dow has not had a 500 point down day since August 10th, 2011.
So, what is causing the market to drop so significantly?
The answer in one word: China. In late July, I sent out a mid year commentary which in part read as follows:
“…a Chinese stock market crash is not that important to U.S. markets. However, a stock market crash that creates real market pain in China DOES matter. China is the world’s incremental provider of global GDP… Bottom Line: It would be very bad news if China’s stock market crash translated into a significant economic downshift for China.”
The problem is that we don’t really know the state of the Chinese economy. Official figures are notoriously “managed”. We DO know that the Chinese acted to devalue their own currency 2 weeks ago. That action surprised the markets while at the same time grabbing the attention of a much wider contingent of market participants. The punch line: Currency devaluation is a form of stimulative monetary policy ---- not a solution to a stock market problem. Thus, it appears that the Chinese are as concerned about their real economy as they are about their stock market! Which of course bothers market participants!!
To make matters worse, the Chinese central bank and other regulators have not been able to stabilize their stock market. Thus, an already nervous global market is getting more uncomfortable with Chinese investments and by extension global risk assets --- as they struggle to find data that supports the notion that China is going to be “ok”.
And finally, once the trend starts to materialize, the computerized trading algorithms kick in and exacerbate the trends. This canot be underestimated. Further selling pressure is likely from a purely technical trading standpoint.
So to recap, we have a narrative playing out in the markets that China’s real economy is struggling. That narrative is getting strengthened by the fact that their stock market won’t stabilize inspite of the best manipulative efforts of regulators. Thus, global risk assets are being hit hard (since China is the world’s growth engine). And then to top it off, those pesky trading machines come in and make the trend worse.
In response to all of this, here are some general thoughts/ideas:
- 1) This is precisely NOT the time to hit the panic button.
- 2) Please take a deep breath and remember that as a client of LWM, your allocation is invested in some strategies that will do well in this environment.
- 3) The Chinese economy is in the early stages of implementing the kinds of manipulative/stimulative policies that the rest of the world’s major economies have been doing for quite some time. They are also implementing these policies from a communist political structure, which means any “implementation slippage” will be less than in other political structures. While both of these facts are not good for the long term view of global capitalism --- I believe they are actually both positive in the short run.
- 4) Oil is now below $40. It definitely has room to go lower in the short term. But longer term I don’t believe these price levels are sustainable. They are stimulative to the global economy in my view.
Bottom line: I don’t think QE (quantitative easing) is dead yet. I think China will join the rest of the world and create highly stimulative monetary policy. And I believe that after the computer trading runs it course, the global markets will likely resume their QE/reflation trade narrative. I suspect that the real economic inflection point will likely occur after the markets digest the upcoming presidential election cycle here in the U.S.
As always, please do not hesitate to call me with thoughts or questions. I will forward my office line to my cell phone so that you can reach me over the weekend as well --- if you care to discuss any of this further.
(c) Laureate Wealth Management
www.laureate-wealth.com
