As I’ve said many times in the past, “the market can go down 10% at any time for any reason or for no reason at all.” Unfortunately, over several days in late-August, I was proven right.
Volatility has returned with a vengeance to equity markets after almost 4 years without a correction (i.e. a market downturn of over 10%). Last month, we had one in literally a matter of days. Since the end of July thru yesterday, world equity markets are down anywhere from 9-12%, depending on the index. The question is: “What caused this? What happened?” It seems to us that the fear in the market really comes down to one primary issue: concerns of slowing global growth. Investment prices, therefore, are being driven down to compensate for that potential outcome.
There are two major themes that are driving investors to believe in slowing global growth:
- China’s growth is slowing down, and possibly slowing down faster than anticipated; and
- Oil prices have declined, which traditionally could indicate slower global growth.
Neither of these concerns are necessarily new—China’s growth has been slowing for three years and oil prices have been lower for months—but as often happens with markets, there is a trigger that makes investors stop to focus on these risks. That trigger seems to be the devaluation of China’s currency last month.
So given this new concern of slowing global growth, the market is in the process of re-pricing itself to absorb this new risk. The point we would like to make is that all of this is on concerns of lower growth. At this point in time, we have little concrete data that would tell us that is actually happening. On the other hand, the data we do have is telling us that the U.S. and Europe are still doing pretty well. Last Friday, for example, the U.S. GDP growth for Q2 came out significantly higher than most people anticipated (over 3%). And this morning, job data came out that almost 200,000 jobs were created, and Europe’s unemployment rate ticked down to the lowest it’s been since 2012. So the takeaway is that the actual economic data is still quite good.
Whenever we see market volatility, it certainly is a “wake up call,” but our job at JPH Advisory Group is not predict the future, but to think clearly about what is happening in the present and re-align our clients portfolios to take advantage of that.