August provided an overdue and useful reminder that investing is not a riskless exercise. The US stock market ended its 2nd longest stretch in history without a correction, having logged more than 1,000 days without a decline of 10% or more. Global stocks fell by 7% in August following losses in July that together cleared the 10% decline that officially qualifies as a correction.
Weaker than expected economic growth in China seemed to be the main catalyst for global market weakness. An unexpected currency devaluation by the Chinese central bank added to unease that Chinese leaders may not have the necessary tools to stem the economic slowdown. After a one-year run-up of over 60%, the Chinese stock market quickly gave back all these gains and more, One reporter said of the rout: "Chinese markets are young, which means they're a bit like watching five-year-olds play soccer: everybody runs in the same direction at the same time."
Encouragingly, the global economy outside of China show little statistical evidence of slowing.
- US Leading economic indicators are up 4% over a year ago.
- Consumer sentiment recently hit its highest level since 2004.
- Domestic employment is healthy with weekly jobless claims at the lowest levels since 1973.
- US 2nd quarter GDP was revised sharply higher last week to 3.7%.
- Cheaper oil and lower interest rates support continued global economic expansion.
The reality is that the market went through a long period of subdued volatility and the return to more normal volatility has sparked panic. As we suggested in last week's email to clients, market selloffs are scary and the normal human response to apparent danger is to worry and react accordingly. Ultimately, maintaining a diversified asset allocation, sticking to an investment discipline, and using the opportunity to rebalance are concepts that have rewarded investors in past market selloffs and should continue to prove valuable in a period of higher volatility.
In keeping with our investment discipline, which removes emotion from the process, several risk reduction triggers were hit at the start of the month. Along with regular rebalancing, we reduced exposures to US stocks and developed international stocks in the most recent round of trading.
We encourage you to call us or email us if you have any questions about markets or your portfolio. As always, you can reference the RPG Monthly Market Snapshot by clicking here for some key economic data points and index returns.