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Frazier Allen: Equity markets stumble in August on global worries

F&M Investment Services - Raymond James - Clarksville, TNClarksville, TN – The equity markets, and subsequently investors, experienced some wild swings toward the end of August, spurred in part by China’s faltering economy and a drop in oil prices. On paper, global equities have lost trillions in value after China unexpectedly devalued its currency earlier this month.

The move triggered concern that one of the world’s largest economies, especially its manufacturing sector, is growing at a slower rate. Consumer confidence also declined in August as the stock market turbulence dulled Americans’ outlook for the economy.

Frazier Allen
Frazier Allen

The three major domestic indexes plunged and rallied in quick succession, but ended the month down more than 6%, with the broad-market Standard & Poor’s 500 marking its worst month in three years.

On the other hand, recent data reports have continued to suggest moderately strong growth in the U.S. economy. Consumer spending improved in July, durable goods orders increased, the housing market is strengthening, and household income advanced. The estimate of second quarter GDP growth was revised to a 3.7% annualized rate (from 2.3% in the advance estimate). We await the latest job figures, which are expected to show relative strength in August.

Oil prices reached a six-year low in recent weeks, which should be good for the American consumer but less so for energy companies. Still, as energy prices stabilize, inflation should move somewhat higher, and Federal Reserve policymakers will begin to raise short-term interest rates ahead of that.

The Federal Reserve’s annual symposium in Jackson Hole, Wyoming, saw central bankers discussing inflation, the global economy and the fallout from China’s economic woes, but officials provided no clear guidance as to the timing of the first increase in the federal funds target rate. The St. Louis and Cleveland Fed Bank presidents reiterated, ahead of the retreat, that U.S. fundamentals remain strong and a September rate hike is still a possibility.

“It shouldn’t really matter whether the Fed begins to raise rates in September, late October, or mid-December,” noted Raymond James Chief Economist Scott Brown. “The important thing is the pace of tightening beyond that first move. …The economy has made enough progress and is strong enough that it can easily withstand a small increase in rates,” according to his August 31st commentary.

I’m sharing all this with you to keep you informed about global economic movements and market events. Our focus remains on disciplined long-term investing. In the meantime, we’ll continue to monitor market developments and update you accordingly.

It may help to put this past month’s 6% pullback in perspective. Volatile periods of 10% or more declines have been relatively common (historically about once every 18 months or so), but it has been four years since we saw one of that magnitude.

I understand how market gyrations like the ones we’ve seen in recent weeks can be concerning and acknowledge that we’re likely to see their effects reflected in your August statement. I’ll also note that the volatility could provide an opportunity to selectively add positions, as well as a chance to proactively look for rebalancing and tax-loss harvesting opportunities.

Should you have any questions about the markets or your long-term financial plan, feel free to contact me. I’d be happy to help.


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