Destroy After Opening!
Based on the call and email volume over the last few days, it has become apparent that many of you faithfully open your statements each month! The S&P 500 saw a 6% percent downturn in August alone and moved into correction territory by losing at least 10% from its high point. I know many of you read our “Weekly,” emails and attend our seminars. We have carried a consistent theme throughout. Not having a correction in four years is a bit like not exercising or dieting for four years and then getting on the scales. You shouldn’t be shocked, but somehow we all are. However, the sticker shock of seeing your portfolios down so much from one month to the next takes you to memories of bleak times not so long ago. Through all of our conversations, communications and research with our investment partners and with LPL Financial, we continue to believe that we are in the midst of a normal correction within a secular bull market. We see no consistent signs of recession. We have Gross Domestic Product (GDP) growth, low to no inflation, job expansion, low interest rates, corporate growth in most sectors, and consumer spending growth.
We are not Pollyannaish and see two or three headwinds. If you attended our recent Mid-Year Outlook seminars, you know we spent a lot of time talking about China as a major possible headwind and possible Excedrin headache. Their lack of transparency coupled with the fact we don’t believe their Communist leadership has a clue about how to manage financial systems trying to straddle both capitalism’s ebbs and flows with communistic authority. We believe their forms of financial engineering will likely erode. Without fully knowing at what rate China’s GDP is truly slowing, we cannot fully discount this headwind. So, we’ll continue to watch them closely and monitor their impact on our markets.
We do believe the second headwind of market risk caused by the Fed’s need to hike rates in September or December might cause short-term volatility. We believe a 25 basis point increase might cause short-term trading to the downside, but interest rates will still be effectively below zero with even with the modest inflation we have currently. We do not see this alone having sustaining impacts on markets in the nearer term.
Finally, the strong dollar’s impact on oil and other commodity pricing is certainly hurting emerging markets and many S&P energy-related companies. With additional Iranian oil likely to flood already saturated markets, we don’t see how pricing hardens. However, one man’s headwind is another’s tailwind….it just matters in which direction you’re walking. Paying roughly 50% less today at the pump than this time last year is acting like tax decrease for Americans. This has allowed consumers to pay off some debt and now feel more comfortable about spending again with Christmas not off in the too distant future.
It would not surprise us at all that a flare-up of one or a combination of any of these potential headwinds would cause this hormonal market to test to the downside again. Most corrections test their lows. So, don’t be surprised if you see a series of bad days in the not too distant future. It is to be expected. The best thing to do is watch something other than CBNC and don’t break the glass in case of emergency. We think we’ll have lots to celebrate during the holiday season.