The Dow took its worse drop in 4 years, losing 531 points by the end of the day.
Timothy W. Suffish–SVP, Head of Equities, comments on the volatility and the reasons behind the steep drop in the U.S. stock market.
As Head of Equities at St. Germain, I needed to comment on today’s drop in the stock market. With CNBC reminding investors that the Dow is currently down 1,000 points in August, it’s time to take a step back, evaluate what is happening, and take a deep breath!
In our July letter we outlined some of the reasons why we developed a cautious investment outlook. Over the past several months this has translated into taking some risk out of the portfolios. You have likely seen trade confirmations detailing recent sales. The increase in cash levels reduces the risk profile of your portfolio and your exposure to down markets.
Yes, with back-to-back days of 300+ point moves, volatility is back. However, let’s keep in mind that 300 points is “not what it used to be.” With the Dow at 17,000 (+/-), 300 points represents a move of less than 2%. Downside moves like this are not pleasant, but it is worth remembering that moves like this should be expected to occur regularly. While 2015 has thus far only seen two trading days with a 2% move, the norm is that such moves happen with much more frequency.
Let’s examine the situation a little closer and look to two causes: 1) China, and 2) the narrowing breadth of the market. In China, the weakness in their economy is driving some of the “risk off” move in today’s US market. While the economic data here in the US continues to be pretty good, the economic weakness in China and the commodity markets are driving the recent selloff. The recent narrowing of the US stock market means there are fewer and fewer leaders, while the overall market has been getting weaker.
Fears around Chinese growth have rattled China investors to the core. Chinese stock market volatility has been extreme where 3% to 4% daily moves have seemingly become common. Chinese authorities have been attempting to support the Chinese stock market, but government intervention rarely works. On the contrary it has added a lot of volatility. By comparison, the volatility in the US stock market has been tame.
In times of US weakness the typical move would be for the Fed to cut rates. Obviously, there is no room for that at this point. In fact, there is discussion of raising rates, although the timing of this may be delayed. This adds further nervousness to the US market.
Is now a time to panic? No. We are very comfortable with the positioning of the portfolios. Downturns in the stock market are sometimes referred to as “buying opportunities.” But, that is only the case if you have cash on the sidelines. With our recent portfolio adjustments, we are well positioned to take advantage of buying opportunities that the market may present.
We were not buying today, but we will be looking over the next few days we’ll to see whether an entry point has arrived. Next week we hope to send another more detailed Capital Market Update with graphs and other supporting evidence. If you have not already signed up for this, please email us at email@example.com “CMU” in the subject line.
Please call your account representative with any questions.