What's going on?
What's so bad about an economy growing at 2% a quarter to warrant the biggest selloff since 2011? Frankly, with China's slowdown, a 60% drop in oil prices, plunging commodity prices, the Fed's indications of a rate increase in the third quarter and geopolitical turmoil in Europe, the tranquility we've experienced until last week is surprising. So what suddenly happened?
Slowing demand from China for basic materials and the devaluation of the Yuan has led to a collapse in commodity prices and a significant impact on emerging market currencies. Interestingly, this alone should not have a major impact on U.S. economic growth because China is not a major purchaser of U.S. exported goods or services. In fact, when Europe and China are in a down market, the U.S. market dominates. Yet the fear of global deflation (and options expiration on Friday) brought on increased volatility and downside momentum.
Last week the S&P ended down 5.7%. Only four other times has this occurred during this bull market and 28 times since 1980. Looking at this data the median return in the next week was +1.1%, the next 4 weeks +1.8% and the next 12 weeks +5.5% (compared to the average return for all periods of +.2%, +.7% and +2.2%). These numbers tell us that pullbacks as the one occurring now present better returns than statistically normal.*
After the relative calm of the first half of the year, it's easy to panic at triple digit drops and indices moving into correction territory. History tells us this is short term and to stay the course. In fact, as we review statistical data, this pullback presents an opportunity to deploy cash to purchase assets that have been unfairly beaten down.
*data from Bespoke Investment Group