CKBlog: The Market

Thursday, August 27, 2015

Market Unrest

by Charlie Haberstroh, CEO & CIO

What does this mean?  Rarely do markets move straight up. The US equity markets have gone steadily higher for much of the last four years without a major correction (above 10%). Are there reasons for concern? Absolutely. Are there always reasons for concern? Absolutely. But how serious is this one and when will it end? The first answer is, “Difficult to know;” the second, “Impossible to know.”

Let’s look at the first. It is clear, as I write this from Brazil, that emerging markets are suffering in general. Certainly Brazil is in recession and many others are struggling with global economic issues, including low commodity prices, as well as fiscal and political issues and some, like Brazil, high interest and inflation rates. China’s new leadership announced rather boldly that they were converting from an export oriented market to a consumer based market and desired to have their local currency emerge as a “reserve” currency (meaning other countries would hold it in their cash reserves). I guess “Mr. Market” had other ideas.

First, Chinese consumers lost a lot of money in real estate and now they have lost more in the local stock market. The reality is that basic conversion is very difficult to do. Remember all the political and economic rhetoric about losing factory jobs to China?

Europe is still inching along at a practically zero percent growth rate. Japan is still trying to nudge its economy upwards in the face of very negative demographics. Russia, Iran, and Venezuela are feeling the pain from low petroleum prices.

The real question is: How is the US economy faring?

The answer is: Quite well. Consumers are benefiting from what looks like much lower (and will probably be even lower) petroleum prices. Low petroleum prices are not helping the oil patch. Those regions, which by the way were very strong economically since the “Great Recession,” will suffer until oil prices stabilize. US companies are still quite cash rich. The US stock markets on average are pretty fairly priced, but that doesn’t tell the whole story—it doesn’t even tell the correct story.

The hot areas of the market including biotech, certain new technology companies, and others are still overpriced, despite the recent price movement. Others which have been hit harder and were more fairly priced to begin with are probably worth looking at.

There continue to be many concerns. Two on the top of my mind are: When will US firms start investing in capital assets as has occurred during past recoveries?  When will the housing market recover as in past recoveries?

Notice that “When will the Fed raise interest rates?” was not one of my concerns. Not that I am unconcerned about higher interest rates. To me as a non-economist, a discussion of 0.25% versus 0% interest rates is not worth worrying about. To the talking heads who don’t have much else to talk about, I guess it is. Most every interested party will not notice whether short term rates are 0% or 0.25%. The rate of interest rate increases—yes. But most will not notice a one-time hike to 0.25%.

My recommendations are similar to what some of the more responsible pundits have mentioned: