Some key points about China and the US economy

January 7, 2016

In the first few days of this New Year we have seen the Chinese Stock market fall over 7% and again fall. The World is connected and the S&P 500 (a measure of the largest companies in the US) dropped in value. The S&P 500 dropped 2% the day following China’s decline. All of our conservative to Moderate investments dropped less than ¾ of 1%. We are all students of history and it does tend to repeat itself. Here are some quick points that the news media tends to skip.

  • The volatility is nothing more than a continuation of what we saw last year (China, commodities, and currency). Nothing indicates a material shift in our economy. This is all emotionally driven volatility.
  • The fundamentals in the U.S. are still strong.  Consumer confidence is at a high, auto sales have never been stronger (a huge deal), services data is strong in the U.S., unemployment is at a decade low, the Federal Reserve raised interest rates (which is a huge deal because it shows our economy is getting stronger).
  • There have been 8 interest rate cycles since the 1950s. On average, the S&P 500 rose for 30 months after the first rate hike in each cycle. The shortest time period of stock price gains was 10 months. On average, one year after the first rate hike, the market was up 9.5%. Not to say history will repeat but that it’s usually a good sign when rates rise, initially.
  • Although you may feel the urge to make big changes in your portfolio, often times it is best to stay the course. Cash only loses money safely; going further up the risk curve will only expose you to more volatility and subsequently risk you selling into panic. Hence, focus on the yield that you are receiving and look longer term.
  • The risk of a U.S. recession remains low.

Part of my job is to make sure we don’t give into panic. Another part of my job is to look for major problems and avoid those risks. Most of my clients are in conservative to moderate portfolios. It is safest right now to avoid extra risk. However, the managers that we work with do tend to try to buy stocks at the bottom and deploy cash when things are down. This can create opportunity. As always, I will continue to watch your accounts.

Until next time,

Plan Today. Protect Tomorrow.

Peter Blatt

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