Equity Markets Retreat in Third Quarter
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From the Desk of
GARRETT D’ALESSANDRO, CFA, CAIA, AIF®
The choppy seas we had anticipated for some time arrived in the third quarter, with market volatility spiking as investors reacted to China’s currency devaluation and more generalized fears that the global and U.S. economic expansions were faltering. The decline in equity prices was swift, marked by a 1,000-point drop in the Dow on August 24 and an overall retreat that left the S&P 500 down 6.4% for the quarter – its worst performance since the same period in 2011. Other markets, especially those of emerging nations, declined even more.
We believe the heightened volatility in the equity markets reflects the uncertainty over U.S. corporate earnings and the outlook for important Asia economies. While these are valid concerns, our view is that over the next few quarters we will likely see U.S. earnings and global economies stabilize and resume their moderate growth trends. We view the slowing in China, in particular, as a reflection of two factors: the slowing in Europe and the slowing in the growth trend in investment and infrastructure spending in China. Neither of which we think will escalate into a hard landing.
Our base case expectation is for the underlying health of the U.S. economy to remain resilient enough to sustain reasonable GDP growth into 2016. We believe Europe will remain a sub-par growth economy for many years ahead until it undertakes meaningful structural and monetary reforms. The odds of such, we view, are low. China needs to change its growth drivers, and needs to generate more from domestic consumption and services – a shift that will take a very long time.
The recent decline also has presented opportunities, as equity valuations in general are now more appropriate to the slow growth mode we expect to remain in place throughout 2016.
As we move through the final quarter, the focus will shift to 2016 and, with uncertainty not yet resolved, we believe investors will bid time during the next few months. After the first quarter in 2016, we think enough uncertainty will be reduced to enable investors to see the slow growth trend as one that is sustainable.
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