1.
Equity Market Turbulence –Fear, Uncertainty
and Doubt – The past week saw wild swings not dissimilar from the last days
of July and early August. Many market observers were calling this the
beginning of the much vaunted correction. But upon closer inspection many
things have come together to precipitate the early week selloff. The U.S.
led intervention in the struggle against ISIS in Syria and Iraq picked up in
intensity and the building coalition was not picking up steam seemingly leaving
the U.S. to go it alone. By the end of the week this was resolved as
European nations joined the chorus of moderate Middle East nations in joining
the endeavor. Rumors and threats of war have always had an initial
dampening effect on the markets but once the situation is clearer the initial
anguish subsides. Also adding to the furor in the markets continues to be
the FED moves to raise interest rates in 2015, with guesses ranging from late
2014 all the way out to 2016. Like I said last week it is time to focus
on actions we can take that have an immediate impact on investment
portfolios. Finally, the issues that impacted the market this week having
substance continue to revolve around the European Union and growth rates in
China.
2.
Chinese Growth Rates – Is Their Economy
Slowing to a Sustainable Level? – Part of the market volatility this week
has a source in the uncertainty and doubt on the direction the Chinese economy
is headed. As a reminder, China is our second largest trading partner
behind Canada and holds nearly a third of the U.S. debt. These are very
important considerations to keep in mind. Just a few short years ago
China’s economy was humming along at 10%+ but has steadily slowed to around
7.25-7.5%. Earlier this week several analysts revealed that the Chinese
economy may have been overstated and growth is slipping at a faster rate.
While not in a recession, pressure from a scarcity of natural resources, a
slowing EU economy and the slow recovery in the U.S. has put pressure on
Chinese manufactures that cannot be fixed in a day. United States
conglomerates doing business in China have witnessed slower sales growth and
even negative earnings from doing business in China; McDonalds, Wal-Mart,
Microsoft and Yum Brands to name a few. The ripple effect early in the
week carried through to the end of the week and pushed down all major U.S.
market indices. If not for the debacle at PIMCO the equity markets may
have fared worse on the week. As it was the S&P 500 was only down
.87% while the DOW Jones Industrial average posted a .88% loss. The tech
heavy NASDAQ was down 1.13%. The weekly market results were helped by a
strong rally across the board on Friday.
3.
The Economy– Disconnect Between the EU and
the U.S. – The U.S. economy continues to demonstrate signs that the
economic recovery is continuing with little or no inflation. Unemployment
and underemployment remain two thorns in the FED’s side as they struggle with
when to raise rates (or more importantly how much and how fast since raising
rates is going to happen). Consumer confidence picked up this week and
the final number for the 2d qtr. GDP reiterated that our economy grew at 4.6%.
The situation in Europe is less than sanguine. Germany has the most
robust economy but is facing challenges while the situation in Ukraine
threatens the overall economy, development of Russian oil and gas as well as
free cross border trading. The full effects of the sanctions imposed by
the West are still in the building stage but Putin is holding his cards close
to his vest in terms of oil and natural gas supplies. Meanwhile the EU is
seeking relief in the energy arena from the Middle East and the North Sea; but
these sources will not erase the problem, leaving the EU economic growth in
doubt.
4.
Ukraine, The EU and Vladimir Putin – Who Will
Blink First? - The Free Trade Pact Ukraine made with the European
Union will not be in effect until December 31, 2015, delayed by the EU as a
concession (appeasement?) to Vladimir Putin to maintain the illusion of peace
in Eastern Ukraine and to help formulate more normal relations with
Russia. As winter approaches Putin is continuing his campaign of rhetoric
against the sanctions imposed by the west. Earlier this month he
announced that Russia was to impose a stiff tariff on all goods imported from
the EU through Ukraine. The impact of these tariffs would be in the area
of $3 Billion Euros on an annual basis and would stifle trade with Russia in
the areas of steel, coal and grain. The economic impact would likely
cripple Ukraine. However, without these resources the economy in Russia
may well grind to a halt where the GDP is currently hovering around 0%. Will
Putin push his country into recession and risk further discord with the EU and
help push the entire continent into a deep recession?
“To choose doubt as a philosophy of life is akin to choosing immobility as a means of transportation.” , Yann Martel, Life of Pi
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