On August 24th, 2015, the S&P 500 Index experienced a long-expected correction (a decline of at least 10%) from its high price achieved on May 21, 2015. Despite a few close calls, the S&P 500 had not experienced a correction since 2011, when it declined amid a protracted Congressional struggle over the national debt ceiling and a U.S. credit-rating downgrade. While selloffs are not pleasant experiences, the four-year run since the 2011 correction represents double the average timespan between corrections – roughly every other year going back to the 1950s.
It has been an impressive bull run in terms of both gains and durability. The S&P 500 has cumulatively gained about 190% from March 9, 2009 through today’s opening price, ranking fourth for returns for all bull markets going back to the early 1930s. At more than 77 months, this bull market would tie for the third-longest over the same time frame.
Declines in mainland Chinese equities have been grabbing headlines since plunging from all-time highs in June. Other emerging markets have been falling as well, with the U.S. joining in late August. But a little perspective may be necessary. Chinese stocks have fallen about 40% since the mid-June peak, but even after this precipitous decline are still up over 40% in just the past twelve months and essentially flat year to date. Investors have been concerned about the timing, speed, and size of tapering and interest-rate hikes by the Federal Reserve (Fed) since at least 2013. Many investors believe the Fed will increase rates in 2015, possibly as early as October, but this seems less likely by the day. The current market turmoil does not seem proportionate to those concerns. Frankly, we have long believed that a rate hike of 25 basis points with gradual increases thereafter should be seen as a positive.
Many emerging-market countries are net exporters of natural resources, of which crude oil may be the most prominent. This is true of the large emerging economies of Russia and Brazil, although China is a notable exception. Both Russia and Brazil have struggled with lower oil prices resulting from a supply glut. Additionally Russia has also been dealing with the fallout from tensions in Ukraine. In China, growth is fueled by a steady stream of commodity imports. As China’s growth has slowed, demand for natural resources has diminished. But lower commodity prices are not all bad news. Lower crude oil prices, and lower commodity prices in general, should help to prolong U.S. economic expansion; Japan and Europe should benefit too.
All this turmoil is revealing a mixed outlook for global growth, with pockets of strength and weakness in emerging markets. Commodity-producing economies and those with close ties to China are struggling. Other countries, such as India, are neither commodity producers nor closely tied to China. India is itself a fast growing economy with a favorable growth outlook.
Corporate earnings in developed markets will be impacted, but we believe there will be some resiliency. The U.S. was probably overdue for a healthy bull market correction. Valuations were getting stretched and equity opportunities had actually become more appealing in Japan and Europe, although we have some concerns about the economic exposures of Germany and Japan to China. U.S. equities are still not cheap from a valuation perspective. That said, selling in the U.S. seems overdone and we still expect the economy will continue to improve gradually with no signs of an impending recession.
Market downdrafts hurt, but they also generate new opportunities for patient investors who remain calm during times of trouble. Changes in the markets and economy are interesting to watch and are important for tactical decisions we make on your behalf when positioning the portfolio in the short and intermediate term. Far more important for a successful long-term outcome is your strategic asset allocation. If it has been a while since you’ve visited with us about your financial goals, please feel free to contact your account administrator. They will find a mutually convenient time to review your account and determine if the current allocation is still appropriate for your circumstances.Investment products are not a deposit, not FDIC insured, not insured by any federal government agency, carry no bank guarantee, and may go down in value.