The volatile ride the financial markets gave us in August seems to be carrying over to September. As of 11:00am EST on 9/1/15 the equity markets were down roughly 2% across the board.
Before I address why I remain cautiously optimistic about the U.S. economy and financial market let’s take a moment to differentiate between volatility, declines in value, and actual losses. Volatility is a fact of life with investments. This leads to increase in decreases and increases in the value of investments. Losses (or gains) only occur when you sell an investment. The chart below highlights this quite well. Just looking at the last 4 years, you will see that in 2011 the average decline in the S&P 500 during the year was -19%, yet the year ended flat (0% change). In 2012 there was a -10% average decline during the year, yet the year gained 13%. In 2013 the figures were – 6% decline during the year, but a 30% full year gain. In 2014 the figures were -7% decline during the year, but an 11% gain for the year.
Here’s another way to look at it. The S&P500 hit a low of 666.79 on 3/6/2009 during the financial crisis. Since that time there have been 21 declines of 5% or greater. Of that 21, there have been 5 declines of 10% or more (including this recent decline), 2 declines of 15% or more, and 1 decline in excess of 20%. Despite this volatility, the S&P 500 has risen 196% from 3/6/2009 through 8/31/2015. (Yahoo Finance)
I expect the volatility to continue. I am looking for the equity market to establish a bottom, which is usually a function of price and time. Ideally, I would like to see a retest of the lows from the last week of August that holds (~1,870 area on the S&P 500). I would then feel reasonably confident that the bottom was established. If that level is violated then I will reconsider my outlook.
Enough about volatility. Now, why I remain cautiously optimistic.
Economic activity in the U.S. continues to show, slow but steady improvement. Last week, the Bureau of Economic Analysis revised their estimate for 2nd quarter 2015 GDP (gross domestic product) up from 2.3% to 3.7%. Included in that report, inflation, as measured by the personal consumption expenditures (PCE), remained low at 1.2% year-over-year. The Commerce Department also reported that consumer spending increased 0.3% in July and U.S. construction spending rose to the highest level in 7 years. On 9/1/15 Ford, GM and Chrysler all reported better than expected auto sales and the Institute for Supply Management reported “Economic activity in the manufacturing sector expanded in August for the 32nd consecutive month, and the overall economy grew for the 75th consecutive month, say the nation’s supply executives in the latest Manufacturing ISM® Report On Business®.“
Yes there is some concern about global economic activity, primarily due to a slow down China’s economy. This is worth monitoring closely. However, the direct impact on our economy is not likely to be significant as 87% of our economy is domestically driven and we import 4 times more goods from China than we export to China (US Census Bureau). The effects of a China slowdown will likely be felt indirectly via the impact on other countries, like Canada, that export natural resources to China.
I continue to keep a close eye of the economy and financial markets and will let you know when I feel action is required. Please let me know if you have any questions or concerns.
September Calendar of Events (comments and additions for future months are always welcome)
- Summer is over and kids are going back to school – please be careful on the roads.
Sep 7th Labor Day
Sept 11th Patriot Day- honoring those who lost their lives on 9/11/01
Sept 13th Rosh Hashanah begins – Happy New Year to all my Jewish friends
Sept 21st International Day of Peace – consider lighting a candle for peace
Sept 23rd Autumn begins
Sep 23rd Yom Kippur (The Day of Atonement)
Sep 26th National Family Health & Fitness day – get out with your family to hike, bike or walk.
Sources: RiverFront Investment Group, Raymond James & Associates, Oppenheimer Funds, CNBC
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