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Market CommentaryA quick reflection on recent market and economic activity
Matthew W. Finn, CFA, Senior Vice President, Chief Investment Officer
August 21, 2015 - Download PDF
Taken in the context of the last 6 ½ year bull-market, the most recent decline in U.S. equities is no cause for alarm. Clearly, global issues are causing some concern among investors as recent weakness in China and emerging economies suggest a slowing for U.S. exporters. However, please keep in mind that economic data here at home suggests continued strengthening in the labor market, low inflation and rising disposable personal incomes. Hardly the formula for a market crisis.
The S&P 500 is up over 200% since 2009, and we haven’t experienced a market correction since 2011. Additionally, keep in mind that our Old National Wealth Management equity strategy includes mid-cap and small-cap stocks which have actually held up much better than the S&P, as well as international stocks of both developed and emerging economies.
Is the decline in global economic activity driving commodity prices lower? Or perhaps a glut of supply is causing the producers to adjust their spending and hiring (a negative) more quickly than consumers are adjusting theirs (a positive). Generally, a collapse in commodity prices is caused by a recession, not the other way around. Cheap oil is more likely to be a positive for all global consumers and a positive for economic growth in 2016.
The minutes from the July FOMC meeting indicated that a majority of board members supported a September liftoff. However, the lack of firming inflation data due to weakening commodity prices may cause some members to decide to wait. In our view, the probability of a September rate increase has declined slightly due to a slowing global economy and an appreciating U.S. dollar, but it is not off the table. The Fed is keenly aware that monetary policy has a 3 to 6 month lag and that delaying beyond September may result in a more rapid pace for future increases.
China has an inventory problem. As commodity prices have weakened, emerging economies have less to spend on Chinese exports. In response to accumulating inventory China has devalued the renminbi, making its exports cheaper. Additionally, excess inventory implies weaker demand for raw materials and a reduction in future output until the situation returns to a more balanced equilibrium.
As it relates to the U.S. stock market, the recent declines in the Chinese stock market are nothing to worry about. Unlike the U.S. where equities are widely held by individuals and institutions in 401(k) plans and pension plans, shares of Chinese companies are not yet widely held by the Chinese people and speculation is rampant.
Although stock selloffs like we are experiencing today are painful to endure, they reemphasize the necessity for clients to maintain the proper asset allocation within their investment portfolios. For example, with stock losses capturing the headlines, most high quality bonds are actually appreciating as funds flow out of stocks into fixed-income investments pushing prices up for these securities. With a five year Treasury note currently yielding 1.43% and high-quality corporate bonds paying only modestly more, bonds may not offer a great deal of current “earnings horsepower”. However, over the long-run, bonds can provide a natural insurance policy against losses in the face of volatile equity markets.
The comments, views and opinions expressed herein are those of the author and Old National Wealth Management. From time-to-time, Old National Bancorp affiliates may issue reports or have opinions that are inconsistent with, and reach different conclusions from, this report. Old National Bancorp and its affiliates do not accept any liability for any direct, indirect or consequential damages or losses arising from any use of this report or its contents.
Investment instruments utilized by Old National Wealth Management are not FDIC insured, are not deposits or other obligations of Old National Wealth Management, Old National Bank, its parent company or affiliates, and involve investment risk including the possible loss of principal invested.
Copyright 2015 Old National Wealth Management - The material contained in this report may not be copied, reproduced, republished, posted, transmitted or otherwise distributed without prior written permission.For more information, please contact a Client Advisor at (800) 830-0362.