(Source: MarketWatch)
(Source: MarketWatch)
Prateek Mehrotra, MBA, CFA®, CAIA®, Chief Investment Officer of Endowment Wealth Management, and its affiliate, ETF Model Solutions, is featured in an exclusive cover interview in the most recent issue of Trusted Insight Magazine. In the article, Prateek discusses his career path, along with the vision that lead to his co-founding of the two firms’ of which he serves as Chief Investment Officer, serving clients through a multi-family service model, and the firms’ investment approach. You can read the article at Trusted Insight website (requires free registration to access).
The Labor Dept. reported that headline inflation fell 0.2% in September from August and was flat or zero on a year over year basis. However, the core CPI which excludes volatile food and energy was up 0.2% over the previous month and increased 1.9% year over year, marking its biggest gain in a year.
Majority of the gain in the core CPI was driven by shelter costs which increased 3.2%. However, the inflation measure preferred by the Federal Reserve, core PCE has a 20% weighting to shelter costs vs. the core CPI which has 40%. Estimates are that the core PCE increased just 1.3% year over year, which is below the Fed’s 2% comfort level.
While inflation is not a worry yet, improving labor markets and wages could subsequently add more fuel to fire in the future. Something we are keeping an eye on.
(Source: WSJ, BLS)
The wealth of American households climbed to a new peak in the second quarter, bolstered by rising real-estate values that more than compensated for a flat stock market.
The net worth of U.S. households and nonprofit organizations—the value of homes, stocks, bonds and other assets minus all mortgages, debts and other liabilities—climbed by $695 billion to $85.7 trillion, according to a Federal Reserve report released Friday.
The report provides a snapshot of the robustness of American balance sheets before the turmoil that struck stock markets in August. Households lost close to $13 trillion in the recession, but a soaring stock market and resurgent home prices have boosted American wealth by $30 trillion over the past five years—gains fueled in part by a campaign of ultra-low interest rates and large-scale asset purchases by the Fed.
This week saw one of the more widely anticipated Fed announcements of recent years as investors looked to see if the “zero” interest rate environment was going to be put behind us. As was widely publicized yesterday, the Fed elected to do nothing, based upon concerns of an economic slowdown, pushing off the prospect of a rate hike. First Trust’s economic team put out a report that provides the text of the Fed’s statement, along with their perspective of what we can expect moving forward. Learn more.
The difficult market environment in August reminded us about the three other Augusts – August 1997 (Asian crisis), August 1998 (Russian crisis) and August 2011 (European debt crisis). In each of those episodes, there were some type of global risk events, and as a result, US market suffered significantly.
In 1997, Asian financial crisis started in Thailand with the collapse of the Thai baht after the Thai government was forced to cut the Thai baht’s peg to US dollar after exhausting its foreign reserve. As the crisis spread to Indonesia, South Korea and Malaysia, most of Southeast Asia and Japan experienced declining currencies, stock markets crashes and a jump in private debt. The crisis raised the fears of global economic meltdown. As a result, the US equity market dropped by 5.6% in August. However, the US market recovered quickly with a 5.5% rally in September.
In 1998, the Asian financial crisis and the following reduced demand for crude oil and nonferrous metals, negatively impacted the Russian exports and foreign reserves. A series of political missteps and inability to implement a set of economic reforms severely erased investor confidence and led to capital flight. Without enough foreign reserve to support its currency, on 17 August 1998, the Russian government devalued the ruble and defaulted on domestic debt. The Russian default caused global liquidity dry up and credit spreads widen, which brought down the then-known hedge fund, Long Term Capital Management. US equity markets tumbled 14.4% in August, but again recovered nicely in September and October.
In 2011, the European debt crisis intensified after it started in the wake of the Great Recession around late 2009. In August, the government bond yields in Italy and Spain breached 6% level as the European leaders struggled to reach an agreement to expand the bailout fund. The US equity market dropped by 12.4% during the months of August and September. However, once again, it recovered in October, gaining 10.9%.
This year, the stock market rout started in China when the Chinese government unexpectedly devalued its currency, which triggered concerns over global economic slowdown. The US equity market declined by 6.1%.
Event | S&P 500 Index
(August) |
S&P 500 Index
(whole year) |
Valuation (current PE) | Short Term Interest Rate | ISM Manufacturing Index |
1997 -Asian Crisis | -5.6% | 33.4% | 21.9 | 5.2% | 56.3 |
1998 – Russian Crisis | -14.4% | 28.6% | 22.0 | 4.8% | 49.3 |
2011- European Debt crisis | -12.4% (Aug and Sept) | 2.1% | 13.6 | 0.0% | 50.6 |
2015 – Chinese Slowdown | -6.1% | ?? | 18.6 | 0.0%
|
51.1 |
The equity market drops in the first three crises all recovered nicely and quickly. Will this time be the same? We believe it is quite likely though we still recommend caution.
(Source: Julex Capital)
With the market in flux, it’s important to think rationally and practice patience. To accomplish that, here are 10 phrases you should NOT be telling yourself:
(Note: The above is a re-post from the Brinker Capital Blog)
China Large and Small Cap Indices seem to be approaching longer term valuation levels. Also:
We continue to maintain an allocation to China A Shares in the Endowment Index.
Bob Doll’s comments on recent equity market volatility share many of our same viewpoints:
Possible reasons for recent market decline:
Near term thoughts-
Market dynamics- The belief that this swing is likely caused by technical factors and not fundamental weakness in the economy, when combined with the fact that previous declines during this bull market have been buying opportunities, there is belief that this is one as well.
Of course, past performance is no guarantee of future results.
There are various ways to measure inflation including the headline CPI, as below:
These are year over year numbers. Hence, despite the decline in commodity prices the Fed believes that inflation is heading towards its 2% target.