The volatility we have been experiencing since mid-August is a result of the confluence of a market waiting for a reason to correct, substantial negative information coming out of China, and seasonal low trading volume. We have been in a strong bull market domestically, especially in the world of growth oriented companies. Although we have had some small corrections along the way, all bull markets require a periodic reprieve. This causes some short-term discomfort and low statement numbers, but ultimately we believe this will allow volatility to normalize and overall investor confidence to improve, creating a stable foundation on which to move forward.
The majority of the recent turbulence in the market has been a result of over China’s growth (or lack thereof). As China continues to slow, there is uncertainty over what effect this will have on the global economy given its somewhat fragile state. We believe that this concern could be less of an issue than the markets are making it out to be, and that perhaps this is a scapegoat for a market that needs a reason to catch its breath and re-focus.
Domestically, we are showing signs of continued strength and moderate growth. The Commerce Department revised second quarter GDP from 3.7% to 3.9% on an improvement in retail sales1. Total nonfarm payroll employment increased by 173,000 in August, trimming the unemployment rate to 5.1%2. We believe that that if we continue to see numbers like this, combined with the tailwinds of a fairly robust housing market and low energy costs, our domestic strength could be just what we need to offset the effects of a slowing China.
We have been enjoying a steady bull market (domestically) for some time now with very few disruptions along the way. As investors we understand that markets progress, and all progressions involve corrections. As long as we are sitting on an economically solid foundation, we haven’t yet seen the stereotypical signs of a market peak, and there is no “Black Swan” in our midst, these temporary setbacks are healthy. This doesn’t mean that they are easy by any stretch, just that they are a normal part of a healthy market.
We anticipate that this will give investors the needed opportunity to evaluate the situation, take a deep breath, and regain their confidence. We don’t expect that this will happen overnight, and until then we will most likely experience a continuation of the recent volatility. As your investment managers we are using this time to critically examine all of our investment positions, take tax losses to offset existing gains, and take advantage of opportunity in undervalued, oversold securities so that we too have a better foundation on which to move forward.
1 Commerce Department
2 Bureau of Labor Statistics
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