The markets have had a welcome small bounce back so far today. To follow up on my email yesterday, I’ve assembled some various thoughts regarding this market volatility from various market sources I receive updates from. This could get worse before it gets better, but most of my sources still view it in the context of a normal pullback that has been overdue, but without the main structural concerns here in the US like there were in 2008 where we had really weak banking and lending fundamentals and overheated markets and credit (especially with the impact of housing). Although our markets have been up for the last 6.5 years there has never been a feel of excessive optimism driving prices to unrealistic levels (like what we did see in Chinese stock markets this past year).
Dr. David Kelly from JP Morgan emphasized on a conference call yesterday that short term selloffs are largely about psychology, mid-range market results are about economics, and long-term results are about valuations. Psychology is going to be what determines what happens in the next days and weeks. Fear can cause panic selling to continue, but at some point those investors looking at economics and fundamentals will be looking for good buying opportunities.
Mid-range US economics have actually looked pretty good lately (especially with housing, employment, autos etc.) with definite talks of the feeling that the Fed could finally raise interest rates in September (something that seems much less likely now) and valuations are obviously more attractive now than at the beginning of last week (where they were moderately high to fairly valued depending on the metrics used) as we look forward.
China is clearly the big concern (and primary cause of this recent global decline) and I do have concerns that data from China can be less reliable and it’s hard to know the extent to which these market declines can have on the psychology of the Chinese consumers as well as those countries and economies who have had a major reliance on supplying the major Chinese demand over the last 10+ years. We have seen commodities (from oil to gold, copper, aluminum etc.) all decline significantly affecting many emerging markets. China devaluing their currency a couple of weeks ago has led to more skepticism regarding central banks around the world being able to sustain their monetary policy decisions without leading to unintended consequences. There are certainly plenty of intertwined concerns that could be exposed and lead to bigger issues. For long-term investors I believe that a policy of staying the course (or modifying allocations to be more conservative if you feel uncomfortable with current volatility) is appropriate. For those with shorter term goals, let’s make sure that your portfolio is in a position you are comfortable with.
Edward Foy – Deja vu (more a reflection of the most recent decline last fall and the nature of how quickly things can turn)