Locally based CPA firm since 1956

On Thursday August 20, the S&P dropped 2.1%, placing it just below its March low and starting a period of volatility we haven’t seen since early 2009. The August decline in the S&P 500 was 5.5% with an intra month low hitting negative 11.3%. This was the second worst August since 1980. The worst occurred in 1998 when the S&P was down 14.6%. Perhaps the biggest technical obstacle may be insufficient breadth. Only about 31% of the stocks are above their 200-day trend lines. In the past when stocks were trading below trend lines with similar breadth while GDP and jobs were growing the market rebounded sharply.

What caused this correction? The early headline news placed the blame squarely on China as economic data from China has been, in a word, ugly. Among other factors, giving investors plenty to think about is the cause and effect of China’s slow down. Already emerging markets are now back to 2011 lows and large U.S. companies who derive significant amounts of revenue overseas are down significantly with about 1/3 of the large cap stocks down over 20%. The combined ripple effect of the slow down and China, and the precipitous drop in oil prices has had an overwhelming effect on investor’s psyche.

The next point of pain for investors to worry over will be the action or inaction of the Federal Reserve Board (The Fed). During the Fed’s recent annual gathering in Jackson Hole, Wyoming, Federal Reserve Vice Chairman Stanley Fischer said there was a “pretty strong case” for raising rates at the U.S. Central Bank’s September meeting, further spooking investors after a tumultuous couple of weeks on Wall Street. That message conflicted with New York Federal Reserve President William Dudley’s recent comments which said the case for a September rate hike has become “less compelling” following the recent market turbulence sparked by worries about China’s economy.

“Interest rate hike speculation will likely remain in the limelight, as the mid-September Fed meeting comes into focus,” said Gina Martin Adams, equity strategist at Wells Fargo Securities. The overwhelming consensus is that the first move of the Fed is not nearly as important as the pace the Fed may take in raising rates. There is a compelling story for what is being referred to as a “one & done”, meaning the Fed will raise rates one time then set for a period of time before raising rates again.

We remain of the belief that the market will continue to be volatile until there is greater clarity about monetary policy in the U.S. and the prospects of economic growth in China.

On the home front, perhaps the most important reason to remain invested and remain calm is that the housing market here in the U.S. has now rebounded quite nicely. Housing starts are now at 1.2mm reaching a 7 year high. Other good news in the domestic economy is manufacturing strength numbers remain around 53 with any number over 50 signaling expansion. Just today the labor department said productivity of nonfarm workers, which measures the output of goods and services per hour worked, increased at a 3.3% seasonally adjusted annual rate from April through June. This is the strongest pace since October 2013. Although it seems like distant news but consumer, business, and government spending helped propel better than expected growth in the US for the 2nd quarter. All indications are that the spending in these areas has continued.

Importantly, unemployment numbers are now coming in around 5.3% and expected to improve to around 5.1% by year end. It is projected that for each home built there are 100 jobs added to the economy and for each automobile built there are 70 jobs added to the economy. Two industries that have a large effect on employment are housing and autos. With both industries showing the best growth in years, prospects for employment are strong.

Next on our radar that will probably cause some volatility and bear watching closely is the upcoming budget battles which could cause a temporary shutdown of the government or a least a shutdown of non-critical areas of the government.
When all around there is worrying news, much of the worry has likely made its way into securities prices.

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