The fall in global stock markets the past few days has been sharp and painful. Usually with these dramatic drops comes a catalyst that set the decline into motion, and in this case it is no different. Here is a quick synopsis of what happened, the damage it caused, and how we are handling it with our client investments.
China’s economy has been slowing for over a year now and their stock market has had some precipitous falls of late making headlines around the world. The recent catalyst, however, was when on August 11th the Chinese government decided to allow their currency to ‘free float’ (to a certain extent) against other international currencies which effectively devalued it. This means that with a currency that’s now worth less, foreign consumers can buy more products from this exporting nation. This also means that many other emerging market countries that compete with China may now also be forced to devalue their currencies in order to compete for their share of world exports.
The Chinese stock market (symbol FXI) has fallen -19% year to date due to their slowing growth. The concern over the Chinese economy has also spawned a new round of selling in oil, and WTI crude has fallen to $39/barrel from a high of over $100/barrel just last year. There are many factors that impact the price of oil, but demand from China over the past several years has been a major factor and highly sensitive to when it comes to investors. Other natural resource investments have not fared well either, with natural gas and metals both down over -40% year to date. Stocks in Emerging Market economies have also taken a big hit this year and now are -19% in 2015.
THE ELMWOOD STRATEGY:
We have been on record and continue to believe that the U.S. economy and therefore our stock market is in a stronger and more stable position than all others worldwide. We exited any direct investments to China and/or the Emerging Markets early in 2013 and plan to stay out of these higher risk areas for the foreseeable future. We also adjusted our energy holdings downward throughout the first half of 2015 in anticipation of further risk to the price of oil and natural gas, respectively. Though oil still looks to be in a difficult predicament, we are getting closer to finding a bottom in the price of oil and expect that toward the end of the year things may turn around for the better. We also cut back our natural resource investments to include only individual companies and have stayed away from commodity, oil, natural gas, and hard metal ETFs.
THE WAY FORWARD:
We do not believe this current downdraft in the stock market is long-term in nature, but there are three things that need to happen in order to create a more stable market, in our opinion.
1. The Chinese economy needs to stabilize and begin to show growth again. In the past Chinese government officials have been very aggressive combating economic weakness, so it seems plausible that they will act to stimulate their economy.
2. The price of oil needs to bottom and sentiment around oil needs to be overwhelmingly negative, so that no one believes the price of oil will rebound anytime soon. That will allow for future positive surprises.
3. The Federal Reserve needs to raise interest rates just once. The stock market is overly preoccupied with when they will raise rates, and once this uncertainty is removed, investors will again be able to refocus on our good economy.
We understand that even after reading the above, many of you might still be anxious about the market which is completely understandable and normal. For both clients and non-clients alike, if you would like to speak in person about these events please let us know and we will contact you as soon as we can.