Due to the stock market selloff and extreme volatility we experienced in August, we sent an e-blast last week reminding our readers that this is not 2008-2009 and that the recessionary conditions that loomed then are nowhere to be found today.
In 2008-2009:
- We had a fragile banking system and a major banking crisis.
- We had billions and billions of subprime mortgages imploding the investment accounts of conservative trust funds all over the world.
- We had double digit unemployment.
- And we had massively overleveraged consumers declaring bankruptcy and being forced from their homes.
Yes, there are a few problems today:
- We have a world where the second largest economy (China) is slowing down. But even a slowing China is growing faster than most economies in the world. A slowdown in China is much more detrimental to countries like Japan and Brazil who trade with China much more than the U.S. does.
- Greece, our planet’s perpetual deadbeat, is still iffy on whether they will pay their debts. But it never seems to matter because their debts keep getting pushed further into the future.
Although there are the typical skirmishes in most of the typical hotspots around the world, there seem to be no significant global problems that have the potential to adversely affect the U.S. economy any time soon.
Meanwhile:
- Housing construction is strong.
- Auto sales are gangbusters (Wall Street Journal headline September 2, 2015, page B1, “Car Sales Zoom to Best Pace in 10 Years”).
- Lower fuel prices at the pump are acting like a tax cut, leaving more money in consumers’ pockets so they can consume (or pay down debt, which will eventually allow them to consume more).
- The Labor Department announced 178,000 new jobs were created in August, below the consensus estimate, but also lowering the “official” unemployment rate to 5.1%. That makes 66 consecutive months with net positive new jobs.
- And, oh yes, GDP for the 2nd quarter was revised upward from 2.3% to 3.7%! This revision was due to positive things like consumption and investment, not a buildup in inventories.
The reality is, although the manufacturing sector of our economy is getting blistered because of the strong dollar, the U.S. has become much more of a service oriented economy over the past 50 years. Health care, lodging, travel and financial services, to name a few, are fairly insulated from what’s going on in the rest of the world.
So why is the stock market going down? Maybe the question should be, “Why has it gone up for four years without a meaningful correction?”
Below is a graph of the Standard & Poor’s (S&P) 500 Index for the past 10 years. Since the stock market bottomed in March 2009, there has only been one significant correction. That occurred in 2011.
Since the end of February 2009, the S&P 500 increased 200%, with an annual return of 20%, and that includes the correction of 2011. Did you think that a climb would just go on forever?
So now we are finally getting a meaningful correction, which was long overdue and everyone is all, “China is slowing down! OMG!”
Relax. Meaningful corrections are opportunities to buy stocks, not sell the ones you own in a panic.
Having said that, I have to concede that the volatility associated with this correction (and maybe every correction for the rest of our lives) can be unnerving. It seems every day brings a move, up or down, in excess of 1%. Our advice? Quit watching CNBC. It is their goal to make you nervous so you will stay riveted to the TV screen, thereby creating more advertising dollars for CNBC. Don’t fall for it.
Meanwhile, the Federal Open Market Committee (FOMC) meets this month, and it has been widely speculated that they will raise short-term interest rates for the first time in many years. This may be one of the more over-hyped expectations since Y2K.
If they elect to raise interest rates, it’s no big deal because everyone is expecting them to do so. The expectation that they will raise rates is pretty much already baked into market valuations.
However, we think there is a reasonable possibility that the Fed may (once again) elect to do nothing, leaving rates where they are, which is almost at zero.
Oil prices are way down from a year ago. Other commodity prices are also way down. Inflation is not a near-term problem, so the Fed doesn’t need to raise rates to fight inflation.
The strong dollar has hurt revenues and profits of multi-national corporations, and it would be nice if monetary policy could provide a reason for the dollar to back off just a smidge. Raising interest rates would not likely be a reason for the dollar to decline, and it might possibly make the dollar stronger.
Because 2nd quarter GDP was revised upward to 3.7%, I’m guessing the Fed WILL raise interest rates. But don’t be surprised if you hear that the Fed decided to leave rates where they are.
As you are already aware, August was a brutal month for stock markets all over the world. The S&P 500 declined 6.26% and foreign markets declined almost 8%.
Bond markets took a different path in August. There was very little volatility and interest rates remained almost unchanged.
This is another major difference between the economic environment of today and of 2008-2009. Interest rates on Treasury bonds declined as investors purchased Treasuries in a “flight to safety.” That didn’t happen in August. The 10-year Treasury bond began August with a yield of 2.21% and ended August at 2.17%.
At Boyer & Corporon Wealth Management, we do not view this market correction as the beginning of some apocalyptic selloff. We view it as a normal and healthy correction. We are trying to take advantage of the increased volatility to trade hedging instruments. Otherwise, we are maintaining the majority of our equity positions.
This information is provided for general information purposes only and should not be construed as investment, tax, or legal advice. Past performance of any market results is no assurance of future performance. The information contained herein has been obtained from sources deemed reliable but is not guaranteed.