Q3 Economic and Investment Update
This column is not much fun to write when the markets are volatile, and it feels like we are giving back all of the gains we experienced earlier this year! The good news is that US economic indicators aren’t showing signs of an imminent economic downturn. Looking at the returns so far this year, some categories have positive returns. Specifically US growth stocks are in the black at around 1%, US value stocks however, are in negative territory at about -5%. Similar to the US, in foreign developed markets growth also outperformed value. As expected with all of the bad news from China, emerging markets have the largest losses at about -11%. Bonds are hovering with very low positive returns in most domestic categories, and greater losses in the foreign and emerging market bond categories.
Earlier this year the big scare was Greece’s plight (a country with an economy the size of Miami. This recent downturn in August reflects problems in China, their economic slowdown and surprise devaluation of their currency, the yuan. Since China has a much larger economy, the second largest in the world behind the US, these signs are legitimately a greater worry. Keep in mind that while China may be sinking world markets, it may have some impact but will certainly not sink the world economy. Also note that CMP portfolios do not include securities that trade on the mainland Chinese Shanghai and Shenzhen exchanges primarily because China does not have true free trade or a capitalistic market. Rather, our emerging market strategies invest in Chinese companies via shares that trade on exchanges outside of China, primarily Hong Kong.
Mid-September, equity markets rose a bit on hopes that the Fed would leave rates unchanged at their Friday 9/19 meeting. Ironically when the Fed decided to forego the September hike due to global uncertainly, the markets decided that wasn’t such a good thing after all, and values dropped accordingly! Who would have thunk! The expectation is that the rates will still increase later this year, but that small increases will have little impact on the economy. Overall, US GDP is expected to grow at 3% in 2015 while inflation and unemployment remain under control. Manufacturing is struggling somewhat, as is the case with the global economy.
This recent volatility is the price investors pay for holding equities in order to increase long-term returns. While this strategy is easy to incorporate intellectually, the pain investors feel during these down swings is real. You are not alone!