August Turmoil Highlights Eventful 3rd Quarter

As we highlighted in our Special Market Commentary (dated August 25), a concentration of concerning trends came to a head in late August. Fears over slowing global growth, commodity prices, and a US rate hike provided the main ingredients for an unprecedented period of volatility. This was, arguably, sparked by the devaluation of the Chinese Yuan as Chinese economic officials made moves to address their own fears about their slowing economy.  The second half of the quarter proved to be much less volatile. Nevertheless, equity prices and other risk assets remained under pressure.

 A few key issues are still relevant to how the market may react through the end of the year:

  • Risk assets such as stocks, corporate bonds and high yield bonds remain the most likely to be under pressure in the event of another broad based sell off. Safer asset classes such as municipal bonds, US treasuries and cash proved to be a “safe-haven” in the recent sell off.
  • Despite strong statements from Federal Reserve officials, the federal funds rate was kept at zero during the Federal Open Market Committee meetings in September. The market reacted with a short period of volatility as most were expecting the long wait for a rate increase to finally be over. The next FOMC meeting is scheduled for October 27-28.
  • Despite recent volatility, we are still confident a recession is unlikely. There are a few key reasons for this:
  • Recent risk asset sell offs have seen prices pull back into a valuation area that is no longer overpriced and, in some areas, actually undervalued.
  • US Economic data has continued to be mostly positive. Unemployment, currently at 5.1%, is at a seven-year low. Housing starts are at an eight-year high. These are two key factors in economic areas that are historically good indicators of economic health.
  • Bull markets typically end because of an overheating of the economy; not age. To this point, inflation has been virtually non-existent. This is a good sign that the economy is not facing any immediate risk of causing increased prices and overall inflationary effects.

If you have thoughts or questions that we can address, please be sure to let us know. We hope you enjoy the changing weather and the upcoming holiday season.