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Just Another Manic Monday…

PantagesIt was one of the most volatile weeks for markets in years, with stocks, currencies and commodities gyrating back and forth. At one point on Monday the DJIA was down over 1,000 points and it ended that day down 588. It gyrated the rest of the week but by Friday it closed at 16,643, up +1.1% on the week.

You can probably say that the upheaval was “Made in China” to some extent as fears of a Chinese slowdown and volatility in the Shanghai stock market sent related emerging equity markets down sharply, dragging developed countries along for the ride. The People’s Daily declared the first day of the week “Black Monday” – a moniker that has been used in the US to describe sharp market selloffs. What is it about Monday anyway?

Indeed the Shanghai stock market lost 8.0% on Monday. But Chinese stocks put in a strong finish later in the week after the central bank cut interest rates. But even after that two-day rally stocks were still 7.9% lower for the week. They are down 14.3% so far this month.

By Friday all was well as analysts dubbed the US stock market the comeback kid! The S&P 500 ended the week at 1,989, up 1% over the week. Still, it hasn’t been a pleasant month for the equity markets. The S&P 500 is down 5.3% in August with one day to go.

Europe and Japan are also down in the 5-7% range so far in August while most of the emerging equity markets are off 5-10%, depending on the country.

WTI oil briefly touched $38 per barrel on Tuesday before rallying to close Friday at $45. Quite a turnaround. The Bloomberg Commodity Index is bouncing around levels last seen in 1999.

Perhaps a catalyst for the turnaround was data out Wednesday showing that the U.S. economy expanded at a faster pace than initially thought, reaching 3.7%, in the second quarter. That was up from an initial GDP estimate of 2.3%. (Actually it is a rather mixed report; while investment spending rose there was also a buildup of inventories – that will have to be wound down in the future, subtracting from future growth.)

And remarks by William Dudley might have helped. He is the head of the Federal Reserve Bank of NY and in view of the market turmoil said “At this moment the decision to begin the normalization process (raising rates) at the September FOMC (on September 16/17) meeting seems less compelling to me than it was a few weeks ago.” (Contrary to Dudley’s comments, the vibes coming out of the Jackson Hole meeting of central bankers this weekend seems to be “get on with it!” with respect to raising rates. We will get an answer to that question in a couple of weeks.)

Of course, safe haven US Treasuries caught a bid early in the week as is almost always the case. But I have to say they didn’t go up that much. Evidence that Treasuries are expensive insurance with a high deductible? They gave up the early gains, with yields up 15 basis points over the week to close at 2.18% on the ten year.

Some believe the wild swings prove that the market is irrational. Well, we think the market is usually rational and efficient, although from time to time things can get a little nutty resulting in violent swings. But that is usually based on technicals and sentiment and not really “the fundamentals.”

The fact is that these “tail events” are rare but it is the price you pay for investing in stocks. Eventually markets bounce back. (The FT notes that historically, markets tend to bounce back quickly after falling so fiercely.) That’s not to say that there aren’t risks out there. Global growth has been sluggish, especially the emerging markets and China. And policy makers don’t have as much firepower as they once had. Rates are already at record low levels and fiscal policy is constrained by large government debt levels. A lot of this is “in the markets” but it’s still a headwind.

The question one needs to ask before you “do something” during these market storms is what has this done to your long term outlook? Usually the answer is nothing, which is probably also what you should do with your portfolio. It was built with the long term in mind, not with an eye to capturing (or reacting to) short term violent swings in the market. Indeed, study after study have shown that short term market timing is a loser’s game and results in investors being whipsawed.

It looks like the August payroll employment out next Friday will likely advanced around 225,000 and the unemployment rate should slip to 5.2%. The wild card in the report will be hourly earnings. With the unemployment rate below 5.5% and falling, most economists expect wage gains to soon accelerate. ISI believes that the odds are high that the unemployment rate declines below 5.0% within the next six months.

ISI: Retail gasoline prices are on track to plunge 40 cents over the next six weeks. CPIs around the world may fall back into YoY deflation. The US core CPI slowed unexpectedly in July to just +1.3% YoY.

Three American guys and a Brit on a train….in France, with a terrorist. What a great story and so emblematic of the brave, let’s get the bad guys, spirit of America! Three young American buddies, realizing “you either do something or die” take down a fully loaded terrorist on a train in France inspiring a Brit (a businessman, no less!) to join in.

By the way their message was simple. When you see danger, act quickly. The terrorists are counting on passivity. The Brit was asked if he was afraid and said sure, but “once you get moving the fear goes away.”

They all got the French Legion of Honor, which was created by Napoleon Bonaparte in 1802 to reward “outstanding merit.” President Francois Holland said of the men and their actions, “they show us what is possible.” They do indeed.

Have a great weekend everyone. Watch out for President Obama in Anchorage this weekend. He is also out and about the state early next week. It’s going to be a madhouse!

Jeff Pantages, CFA®
Chief Investment Officer

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