Market Update for August 20, 2015
A few days ago we posted a blog post talking about the possibility of a market correction. We don't know if it's starting now or not, but we are going to see more volatility in the coming months.
The reason for this is that emerging market economies are slowing, with China being the chief culprit. Developed countries (U.S., U.K. and the Eurozone) economies are still growing. In fact, the U.S. and the U.K. are considering raising interest rates to get them back to normal.
China has structural economic problems. Their stock market (which you are NOT invested in) is in a bear market. Real estate values are likely in bubble territory. Chinese investors and consumers are in a bad spot. At this point, we don't believe the issues in China will lead to a global financial contagion. In an effort to bolster their economy, the Chinese devalued their currency. This is a boost in the arm for their ability to export goods to developed countries.
Oil prices have dropped. The main reason for this is a huge surge in the global supply of oil. Saudi Arabia has cranked open the spigot to devastating effect on the U.S., Russian and Brazilian oil producers. This isn't good for energy companies but it's fantastic for just about every other sector of the economy (especially manufacturing, transportation) and for consumers. SUV and truck sales should be up this quarter. Electric cars, not so much. It's the economic equivalent as an across-the-board tax cut.
Many investors fear a return of the 2008-2009 credit crisis. Are we heading into another 50% stock market meltdown??? Based on the current data, we think it's unlikely. Our financial system is sound. Our banks' balance sheets have healed tremendously. Our economy is in second gear with 2% growth but the Fed is still intent on raising interest rates, which is good for us in the long-term. This implies that they don't see our economy stalling.
What about inflation? The Fed has printed an enormous amount of money but it's sitting on bank balance sheets. We won't see inflation until the banks are eager to lend. We're not quite there. DO NOT BUY GOLD.