The uncertainty concerning the Chinese economy, which escalated following the sudden devaluation of the Yuan, has raised the specter of a global slowdown and set world stock markets into a tailspin.
The impact has been most severe in China, which saw the Shanghai Composite Index fall over 8% today, wiping out the gains of 2015 – no small feat for a market that was up over 50% in early June.
Emerging markets as well as the developed European markets have also declined, in some places slipping beyond the traditional 10% definition of a market correction into declines exceeding 20%, which we have historically considered bear markets.
Despite our economic strength here in the United States, our equity markets are certainly not immune to the global sell-off, as we have seen severe declines in the past several days. At some point today all major U.S. averages had fallen between 10 to 15% from their respective highs. These sudden and sharp declines can unnerve even the most seasoned investors so we understand the unease many investors are feeling.
The stock market historically experiences a decline in excess of 10% every 18 months on average; this is our first since 2011 and by that measure long overdue. It is not unusual for corrections to be triggered by exogenous events, like China, but they almost always come as a surprise even to market participants wary of the next dip.
While the declines may well continue, the backdrop of the world economy, and particularly the United States, is much better than during the recession we experienced in 2008. Our corporate balance sheets are excellent. Employment, home building and auto sales are all at levels not experienced since before the 2008 financial crisis. Interest rates are near zero, inflation is almost non-existent, GDP growth in the second quarter was close to 2.5% and is likely to be equally as strong this quarter.
Energy prices are at 6 1/2 year lows (bad for energy investments near term but bullish for the economy and consumers) and the strengthening dollar lowers the cost of all imported goods and services into the United States.
For these reasons we expect the U.S. market to eventually recover, and we remain committed to our longer term investment strategies. Substantial selling at these levels makes little sense to us.
When will the world stabilize? Most likely a combination of things needs to happen. Most immediately the Chinese government needs to take obvious steps to improve the liquidity in their country and lower interest rates to stimulate their economy and stabilize their markets. Longer term, Saudi Arabia needs to stabilize the energy markets by slowing production; as long as they are willing to sell oil at any price, prices will continue to decline. Finally, and ultimately, the markets around the world need to reach a level that investors realize represents real value and attract a return to the equity markets. Valuation is like beauty. It is often in the eyes of the beholder, but clearly the indiscriminate selling we are experiencing has already created value opportunities.
Ultimately, we are here to serve you, to answer questions and to make sure we remain on a sustainable path to help you meet your goals. Please call us if you have concerns.
RAY, ERIC, KIM, BRUCE, LOU, NANCY, TINA, JON, STEVE, DOROTHY and PAUL
©8/24/15 ProVise Management Group, LLC
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