Jeff Voudrie’s Weekly Stock Market Commentary
The U.S. stock market may finally be entering a ‘normal’ correction. Yet, we are only down roughly 4% from the highs set in May. Year-to-date the S&P 500 and the Dow Jones Industrial Average are in negative territory (SP500 -0.36%; DIA -1.68%) while the NASDAQ and Russell 2000 indexes are positive 1-2%. It feels a lot worse than that solely because it has been so long since we’ve experienced even a 5% correction.
So is it time to panic?
No. I do not believe that we are entering a Bear market nor do I believe that we will see markets correct the “typical” 10-20%. It is important that investors adjust their allocation based on their risk tolerance and objectives because I do expect stock market volatility to remain for a while. Accordingly, I have been selectively reducing my client’s stock market exposure.
On the other hand, the uncertainty surrounding Greece has resulted in a rush to the safety of U.S. Treasury bonds and we’ve seen the positions in TLT and EDV recover 3-5% in the last few days. I have held on to these positions for the last 6 months because of the economic trends and indicators were signaling that the U.S. economy continues to slow. Employment has now been slowing for 4 months while inflation expectations continue to decline.
In a recent commentary, I outlined how 11 of 17 Wall Street ‘analysts’ were expecting the Federal Reserve to raise interest rates in September. I explained in detail why I disagreed. Well, the probability of a Fed rate hike in September has dropped from 40% down to 16% in the last week. It is highly unlikely that the Federal Reserve will raise interest rates anytime in 2015. Based on the information available, I believe it will be at least into mid-2016 if not later.
Why? There are several reasons but it all boils down to a lack of growth. If the Fed raises rates too soon they could easily plunge a fragile US economy into recession. They have been fighting for years with every tool in their arsenal to try to spur growth and have failed, so the risks associated with a premature rate hike are simply too high. Moreover, a Fed rate hike has implications worldwide and could plunge other countries into recession as well. That’s why the normally reticent IMF has become so vocal in their opposition to a Fed rate hike. The latest headline today says:
IMF: U.S. Economy at Risk of Stalling Next Year if Fed Raises Rates Prematurely
International Monetary Fund reiterates call for Fed to hold off on rate rise until 2016
There are several other developments that indicate the fragile nature of the world economy right now. For instance, any resolution to the Greek crisis is going to result in the Euro declining relative to the USD. That has the impact of importing deflation to the U.S. That will reduce our exports and decrease our GDP. We have been struggling to achieve even a 2% annual GDP and the Greek resolution (when it happens) will make that even harder to do.
Then there is China. Their stock market (which has soared the last several months) is now crashing. It is down 25.8% in the last month. So what does China do? They suspend trading in over 200 stocks and the market still goes down. Roughly 1.4 Trillion of stocks have been suspended from trading in an effort to prevent further meltdown. China is in trouble and so is Europe. Both will affect the U.S.
In this type of environment I am perfectly comfortable having a large allocation to cash and U.S. Treasury Bonds. It has been a painful 6 months in TLT and EDV, but USTs are still the most dependable safe haven in the world—doing even better than gold. The positions in TLT and EDV have helped protect portfolios amidst the volatility and uncertainty surrounding the various crises around the world. And I believe they will continue to do so. Market volatility will likely remain elevated for quite a while, and owning USTs is an effective way of trying to smooth out the ups and downs and possibly even grab some gains..