Summer Volatility Tests Investor’s Resilience
Thursday, August 15, 2019
August can be a tough month historically, for example:
The First Gulf War started in August 1990
The Asian Contagion began in August 1997
The Russian Debt Crisis started in August 1998
US Credit Ratings were downgraded in August 2011
China devaluated the Yuan in August 2015
China again devaluated the Yuan in August 2019
The Financial Times just labeled this the Summer of Fear. Why? A quick look around the globe we see a number of hot spots which easily spook investors: rioting in Hong Kong which dares Beijing to send in the troops, challenges to continued Euro stability via rising tensions in Italy, renewed tension between India and Pakistan over India’s crackdown on Kashmir, financial instability in domestic Chinese Banks, Currency and Trade Cold War between China and the US, weakness in oil markets, signs of economic slowdowns worldwide, hard landing Brexit, continued populist uprisings and lastly an increasing percentage of zero interest rates in government bond markets.
US stocks rose or fell with the news headlines on the US – China Trade War. Relations fell to a new low when China reduced its support of the Yuan leading it to break thru the psychologically important FX rate of 7 to the dollar which lead the US administration to label China as a Currency Manipulator. The consensus view among investors that a deal was around the corner is now dead.
Stocks seesawed and ended last week relatively flat with the large cap weighted S&P 500 closing at 2918.65 and the broader NASDAQ Composite closing at 7959.14 for a weekly loss of .46% and .56%. Nevertheless, the indexes are up YTD at a respectable 16.47% and 19.95% respectively. Gold closed above $1500 for the first time since 2013 and the US 30 Year Bond briefly yielded 2.13% as bond prices rallied as investors sought safety.
Currently the market is in a pullback from the recent highs. I expect market volatility to continue for the foreseeable future and stock markets could even go into correction territory. Corrections happen on average once per, are completely normal, and are defined as being down between 10%-20%.
Looking around the globe the trend toward zero and negative interest rates in the G7 peeked my attention. A recent graph showing that 43% of global bond markets outside of the US are now at zero or at negative interest rates. Last week, Jyske Bank, the 3rd largest bank in Denmark announced that it would offer 10 year mortgages at an interest rate of negative .50%. That means that the mortgage loan declines 50 bps per year before the creditor makes a payment!
While negative rates are unusual in history, this phenomenon can easily be explained. Investors can often demand safe investments at banks or in government bonds. When demand for these services or products increases, the interest rates investors earn decreases, or in this case, the rates have turned negative. Instead of getting a return on their investments investors seeking safety have had to pay to have their assets in safe investments. It really is just a function of supply and demand. Makes sense when you think of it this way.
Investors seeking some reassurance this summer should remember one of Sir John Templeton’s famous quotes, “Bull markets are born on pessimism, grow on skepticism, mature on optimism, and die of euphoria.” It does not always hold true but generally has. As I look around I do not see euphoria or even optimism. And, while times like these can be trying on the nerves it can help to remember that August can be a tough month historically.
If you still have questions about your investments after reading this article, speak with your Certified Financial Planning Professional. Discuss your specific circumstances with them and confirm that your portfolio is suitable for your long-term goals and objectives.
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