Volatility 2015

A recent spike in volatility with a sharp downside bias has resulted in a long overdue stock market correction. China has been in the news as its large economy slows. Efforts by the centralized government there to contain stock market losses and reverse the economic decline have been unsuccessful, so far. The result is a threat to global growth, with emerging market economies particularly vulnerable.

This leads to questions about the strength of the US economy. The slow pace of GDP growth here following the Great Recession (2008-09) is well documented, despite extraordinary stimulus from the Federal Reserve. Low interest rates and quantitative easing have provided a powerful tailwind for stocks but the desired wealth effect has not produced a robust economy. The following chart from the Federal Reserve Board tells the story:

Year Projected GDP Actual GDP
2011 3.0-3.6% 1.6%
2012 2.5-2.9 2.2
2013 2.3-3.0 1.5
2014 2.8-3.2 2.4
2015 2.6-3.0 1.5 (first half)

 

What with a sluggish US economy and a slowing global economy, now may not be the ideal time for the Federal Reserve to raise interest rates. Uncertainty about the interest rate decision has added to stock market volatility. Under no circumstances does the Fed want to threaten the fragile recovery, but they are simultaneously determined to move interest rates up from zero.

Meanwhile, an oversupply of oil and soft demand has produced a treacherous drop in the price for the commodity. Lower gas prices are likely to show up this fall and consumers will welcome the extra cash. But, the recent boom in North American oil and gas exploration and production is in jeopardy, along with many good jobs.

At some point, the selling will be exhausted as investors holding weak hands wash out. For sure, there is less risk in the stock market now that a correction is underway. Sturdy investors know that as we go lower, long term return expectations improve. At ASG, we monitor your portfolio relative to the decline and welcome your calls, texts, and emails.

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