Monthly Markets Memo - September 2015
In August, equity market volatility spiked to levels not seen since the financial crisis of 2008. The major equity indexes dropped between 6 to 9% for the month as uncertainty grew over the slowing global economy and concern that the U.S. central bank would begin raising interest rates. In the U.S., the S&P 500 fell more than 12% through August 25th from its May peak which is its first drop of more than 10% since 2011.
While periods of negative returns can be difficult, especially for those who are relying on their investment accounts for retirement income, they, of course, are not unusual. It is times such as these when it is important to maintain perspective, not only on the current conditions in the market but also in expectations of future returns. With the combination of seeing account values move down and hearing increased negative news on the state of the markets and economy, an investor may be tempted to move away from a long term disciplined investment plan to one that attempts to time or even pull out of the market. Just as it is good to restrain excitement when equity markets rise significantly (like 2013 when global equity markets grew over 20%) we should restrain panic when the markets provide negative returns. Consider that historically equity markets have yielded positive returns over a long time frame. The equity markets allow investors to participate in corporations’ earnings through dividends and growth resulting in a higher equity price than what was originally paid for the company. These companies have varying degrees of success but overall the corporate equity markets will continue to grow similar to the pace of the economy since the economy reflects consumer confidence. While the economy will go through ‘ups and downs’, in the end the companies offering investment opportunities are also participants in, as well as facilitators of, our economy with a combined end goal of wealth generation. A patient disciplined investor can participate in this dynamic focusing on long term goals and a discerning ear toward the noise to help limit short term thinking.
Global Economy Perspective
While equity markets investors have been re-pricing the amount of risk they are willing to carry in equities, the global economy has actually been showing mixed signs. Here in the U.S. things are steady and in fact the jobs market continues to show significant improvement. Since March of this year, filings for unemployment benefits have consistently been below 300,000 which is the longest stretch since 1972.
China's economy clearly has been showing signs of deteriorating growth as economic data points to a slowdown in exports and imports. This has caused investors to be concerned that the People’s Bank of China (PBOC) has been too slow to ease monetary policies. While there may be some truth to this, the PBOC may need to do less than some people think. A major worry for some investors is the drag coming from home construction. While the home construction activity is down considerably (24.7%) this is a lagging indicator as we learned when we recovered from our own real estate/financial crisis. August has brought about some good news in that Tier 1 cities (the largest) now show a Year over Year home price increase of 10.5%, the highest since April 2014. As home prices rise due to a higher demand, home-builders will have a reason to begin new construction. While this won’t happen overnight, a turn in this aspect of the economy would likely help calm fears of global investors.
The anticipated volatility in the equity markets may not be enjoyable but it can serve a worthwhile purpose. During these times, active managers and investors can take advantage by purchasing quality companies at a better price. In addition, market pull-backs test investor’s ability to handle risk. This can cause those with shorter term horizons or unrealistic expectations to pull out which offers long term investors opportunity to ‘wait out’ the recovery. Historically, markets have then usually begun to rise.
For those with questions or concerns regarding the market conditions, please contact your relationship manager or you can send me an email with your question to firstname.lastname@example.org.
"Worry weights a person down; an encouraging word cheers a person up."
Proverbs 12:25 (NLT)
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendation for any individual. Although general strategies are revealed, this post is not intended nor does it reflect transactions within any one account. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. All data and information is gathered from accurate sources but is not warranted to be correct, complete or accurate. Statistical data has been obtained from sources including but not limited to www.bea.gov; www.bls.gov and www.morningstar.com.