Additional Volatility Likely but Opportunities Remain
Sources: Equity Market, Fixed Income and REIT returns from JP Morgan as of 8/28/15. Rates and Economic Calendar Data from Bloomberg as of 8/31/15.
Despite last Monday’s 1,000 point intraday drop, U.S. stock markets actually finished the last full week of August in positive territory with the Dow Jones Industrial Average (DJIA) gaining 1.2% and the S&P 500 Index advancing 0.95%. Through the end of August, however, these two indices are down 5.7% and 2.9% for the year respectively. The volatility that we have witnessed in the markets since China announced the devaluation of the Yuan/Remninbi on Wednesday August 19, is not likely to be over in the short term given several headwinds that lie ahead for the markets. These headwinds include institutional trading behavior, uncertainty around Fed policy, and technical indicators.
As we understanding it, certain institutional investors have mandates that require them to maintain a specific level of volatility in the portfolios that they manage, forcing them to reduce their exposure to equities, regardless of the price they are selling for, in certain trading environments. Whether or not the Federal Reserve decides to raise interest rates in September also appears to be weighing on investor sentiment – at least to the degree that it presents yet another area of uncertainty. Allianz economist, Mohammed El Arian, wrote on Bloomberg of Fed Policy:
“…though policy makers are still eager to curtail spikes in market volatility, they already have expended a lot of ammunition via quantitative easing, floored interest rates and other unconventional policies. As a result, the series of monetary policy actions in China and the calming remarks from N.Y. Fed President Bill Dudley last week could soon be tested by developments on the ground.”
Technical traders may also add downside pressure to stock prices with the S&P 500 index breaking below the 200 day moving average with some models based on technical analysis suggesting an extended period of lower prices. Oppenheimer’s technical analyst, Ari Wald, suggested on Bloomberg markets that this correction looks similar to the one in 2011 and prices may remain at these levels for weeks, if not months, until they stabilize and regain an upward trend.
Despite the increase in volatility, the fundamentals of the U.S. economy suggest this is not the end of what we at Hennion and Walsh believe is a secular bull market for stocks. Consider the table below which summarizes the economic data that has been released since last Monday:
Four of the releases were in line with positive expectations, three beat expectations- including GDP which was a solid 3.7% for the second quarter of 2015 and revised upward to a positive 0.6% for Q1 2015. The only release to underperform expectations was the consumer spending which registered growth of 0.3% over the month prior while expectations were for a gain of up to 0.7%.
The recent swings in stock market prices should serve as a reminder to investors that building and maintaining diversified portfolios are critical towards long term growth potential. Recognizing that not all market recoveries are the same, consider that before the financial crises investors who held 60% stocks and 40% bonds when the market peaked in October 2007 (as measured by the S&P 500 index) gained their losses back almost a year and a half earlier than those who just held U.S. stocks. We encourage investors to take this opportunity to re-evaluate their risk tolerance and asset allocation strategy to ensure they are positioned to achieve their long term objectives. If you would like to learn more about the way Hennion & Walsh is navigating these challenging markets for our clients, please speak with your Hennion and Walsh Financial Advisor or a member of the Hennion & Walsh Asset Management Team.
Important Information and Disclaimers
Disclosures: Past performance does not guarantee future results. We have taken this information from sources that we believe to be reliable and accurate. Hennion and Walsh cannot guarantee the accuracy of said information and cannot be held liable.
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