Last week, equity markets posted their worst week since September 2011. Concerns about the slowdown in Chinese growth and uncertainty surrounding the Federal Open Market Committee’s upcoming potential rate move brought out the bears. Data indicated the Chinese factory sector may have contracted at the swiftest pace in 6.5 years in August. Active devaluation of the yuan is not a good sign of confidence in the Chinese government and indicates greater uncertainty regarding global currency movemen.
The Dow dropped 5.7%, the S&P 500 dropped 5.7%, and the broad-based Russell 3000 Index fell 5.6% last week. International markets slightly underperformed the U.S. with the MSCI ACWI ex-U.S. International Index down 4.9%. Yield on the 10-year U.S. Treasury bond fell, ending the week at 2%.
Our perspective on the week.
Prior to last week, the U.S. stock market, on the surface, had been fairly quiet in 2015. The events over the past week have hurt equity prices and have driven the VIX volatility index, which is a common measure of investor fear, to a four-year high.
However, within this pessimism, there are some positives that we need to be reminded of. First, we remain in a very attractive interest rate environment. With the 10-year Treasury yield hovering around 2%, borrowing rates remain solidly stimulative. Second, inflation remains very tame. Without the fear of a sharp jump in inflation, the silver lining is that the events in China may allow the Federal Reserve to delay any interest rate hikes. Third, the weak Chinese data may push the Chinese government to enact additional stimulus measures, which would be likely to reignite growth. Fourth, most of the recent readings on U.S. economic activity suggest that domestic economy is on a solid, if not better-than-solid, foundation. Recent reports on the housing and labor markets continue to point to a positive outlook. Lastly, equity valuations are not overly frothy right now especially when you factor in tame inflation and a low interest rate environment. In fact, the recent selloff may suggest that we could be in an oversold condition.
While there are valid concerns about economic growth in China, there are many positives that investors should also remember. From an investment standpoint, we do believe volatility will continue to ramp up. However at the same time, we believe there are some potential investment opportunities. Additionally, in all of our portfolios, we have braced ourselves against elevated levels of volatility – including increased diversification and, in some cases, the use of alternative asset classes.
Bottom line, we continue to expect globally balanced portfolios to generate positive returns in the years ahead, although likely not as strong as we’ve seen in recent years. As always, being disciplined in an environment of higher volatility and staying the course with an appropriate investment strategy remains critical. A financial plan that is up-to-date is crucial—circumstances change, and so should the structure of your net worth. Investing without the context of a financial plan that reflects your situation creates unnecessary risk. This includes maintaining adequate cash reserves, which help us ride out periods of volatility.
Articles chosen and summarized by the Cetera Investment Management team. Cetera Investment Management provides investment management and advisory services to a number of programs sponsored by First Allied Securities and First Allied Advisory Services. Cetera Investment Management individuals who provide investment management services are not associated persons with any broker-dealer. International investing involves additional risk, including currency fluctuations, political or economic conditions affecting the foreign country, and differences in accounting standards and foreign regulations. These risks are magnified in emerging markets. Investing in companies involved in one specified sector may be more risky and volatile than an investment with greater diversification.