In terms of gains and losses, the U.S. Equity Markets remain relatively stagnant for the year. If you fell asleep in January and woke up today you would not have missed much, yet you would have missed a lot. The market is moving which is great but the activity has lead no where- so far. The largest variance from December 31st through today was about 3.5%- this is not enough movement to make an impact for anyone in any strategy. We like the chances of the stagnation ending soon, as we’ve seen technical and fundamental indicators shift and watched major indices rattle major markets across the globe.
The last month of action in the Asian stock market conditions felt like riding in a small boat during a windy day on Lake Michigan. Greece nearly crumbled and China, the world’s fastest growing economy, is trying to recover from a 30% drop in their major index in just about a month’s time. One of the most well-known hedge fund managers in the world, Ray Dalio, was recently quoted in the Wall Street Journal saying, “Our views about China have changed. There are now no safe places to invest.” Dalio’s comments seemed to be overstated, as Chinese markets rallied 16% from their recent bottom- until Americans woke up to what could be the early stages of a nightmare yesterday morning; the Shanghai Composite was down over 8% in a single session of trading! To put that into perspective, most investors are satisfied if they earn 8% in a year; an 8% drop in a day is a major blow! The movement in Asian markets remind us that:
- Even the best markets in the world will feel pain at some point and
- Market sell-offs usually happen quicker and more violently than market runs
Since the world is so closely connected now, we believe a continuation in the Chinese sell-off COULD spread across the globe and cause the seemingly unbreakable U.S. markets to follow suit. In addition to China’s volatility, the CAPE Index- an indicator created and published by Nobel Prize winning economist Robert Schiller- is at an historically high valuation. Following the link below to a CNBC interview, you will hear Schiller explain that his indicator is “…higher than it’s been except in 1929, 2000, and 2007.” Interestingly enough, those years were all followed by a U.S. equity market meltdown. Schiller goes on to say, “people keep pointing out the bubble and years go by and that’s when the bubble finally bursts.”
China’s market volatility, the probable interest rate increase in September, and several other indicators including the CAPE mentioned above keep us confident in our thesis that the U.S. bond and equity markets will have a solid correction sooner than later.
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