Week of August 24, 2015

In a week where Wall Street usually heads to the beach for vacation, traders were ambushed by a wave of volatility.

The previous week’s devaluation of the Chinese yuan was followed by the release of poor Chinese manufacturing data that fueled concerns about slowing global growth. The damage had previously been contained to cyclically-sensitive companies like transportation, commodities, industrials and sub-segments of technology, but last week it spilled over to all risky assets. The Dow Jones Industrial Average and S&P 500 each sank 5.8%. This was the biggest weekly point decline since the middle of the financial crisis. The tech heavy Nasdaq Composite collapsed more at 6.8%. As of mid-day Monday, all three indices have entered "correction" mode, or down 10% or more from their peaks. Oil prices were also pushed lower, and the yield on the 10-year Treasury dipped below 2% for the first time since April as investors fled for safety. 

The volatility spilled into this week beginning with a rout in Asia when Chinese policy makers failed to cut rates or bank reserve ratios as investors expected. This pushed the Shanghai Index down 8.5%. This is the ninth consecutive day of losses and it is now down more than 20% from highs achieved in April. The carnage moved westward with most European markets down approximately 4% at the time of publication. And, domestic markets plunged at the open before recovering by mid-day. As of mid-day Monday, major domestic indices are down nearly 1%. 

While there are legitimate concerns about global growth decelerating, we view the chance of a recession as minimal. Since historically this is the cause of the vast majority of "bear" markets (defined as a drop of 20%-plus), we feel we are simply witnessing a stock market correction. Undoubtedly these are uncomfortable, but it’s important to remember that successful long-term investing requires fortitude during these cleansing periods. It is during these stressful radical moves that investors with long time horizons can pick up the proverbial baby thrown out with the bath water. We recognize that these situations are dynamic and are continuously monitoring market developments, but we remain true to time-tested investment discipline and process.

Jobless Claims Signal Strong Jobs Market

The recent market turmoil has Fed watchers questioning whether or not a rate hike will occur in September, and now even the labor markets appear to be breaking down a bit. Last Thursday, the U.S. Labor Department reported that initial jobless claims increased 4,000 to a seasonally-adjusted 277,000 for the week ending August 15. This is the fourth consecutive week where claims have risen. However, claims data is notoriously volatile, and the four-week moving average is still hovering near a 15-year low at 271,500 claims.

Existing Home Sales Lone Bright Spot

A bright spot came last week when existing home sales for July were reported to be at the highest level since February 2007. The number of contract closings grew 2% to an annualized rate of 5.6 million homes. This is up from the prior month’s measure of 5.5 million, according to the National Association of Realtors. However, despite the second month of record figures, higher prices and a tightening supply threaten to slow the recovery. Housing inventory fell slightly to just over 2.2 million homes, a near 5% dip year-over-year. And, while the median sale price dipped month to month to $234,000, it is still 5.6% higher than this time last year.

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_{Securities offered through Jacques Financial, LLC (JFLLC) a Broker-Dealer, Member FINRA and SIPC. Certain associates of Joseph W. Jacques, CPA, CFP^TM are registered representatives of JFLLC. Joseph W. Jacques, CPA, CFP^TM and JFLLC are affiliated. Investment advisory services are offered through Jacques Advisors, LLC an affiliate of JFLLC. Tax services are offered through Jacques & Associates Certified Public Accountants, LLC an affiliate of JFLLC.}