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, CFPTM are registered representatives of JFLLC. Joseph W. Jacques, CPA, CFPTM 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.* Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investments may be appropriate for you, consult with your financial advisor.
* The Standard & Poor's 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general.
* The Nasdaq Composite Index is a market-capitalization weighted index of the more than 3,000 common equities listed on the Nasdaq stock exchange. The types of securities in the index include American depositary receipts, common stocks, real estate investment trusts (REITs) and tracking stocks.
* The Dow Jones Industrial Average is an unmanaged group of securities demonstrating how 30 large publicly owned companies have traded and cannot be invested into directly.
* Shanghai Stock Exchange Composite - A market composite made up of all the A-Shares and B-Shares that trade on the Shanghai Stock Exchange. * (VIX) A broadly cited measure of volatility is the Chicago Board Options Exchange’s Volatility Index, constructed using the implied volatilities of a wide range of S&P 500 index options.
* Indexes are unmanaged, statistical composites and their returns do not include payment of any sales charges or fees an investor would pay to purchase the securities they represent. Such costs would lower performance. It is not possible to invest directly in an index.
* Past performance does not guarantee future results.
* Charts and graphs should not be relied upon as the sole basis for any investment decision and are for general informational purposes only.
* Consult your financial professional before making any investment decision.
* This newsletter was prepared by CWM, LLC.
* Yahoo! Finance is the source for any reference to the performance of an index between two specific periods.
Wall Street Journal, August 2015, http://www.wsj.com/articles/u-s-existing-home-sales-rise-to-pre-recession-pace-1440079684
Wall Street Journal, August 2015 (subscription required), http://www.wsj.com/articles/u-s-government-bond-prices-soar-on-flight-to-safety-1440420595
Wall Street Journal, August 2015 (subscription required), http://www.wsj.com/articles/u-s-jobless-claims-rise-4-000-to-277-000-1440074093
Barron’s, August 2015 (subscription required), http://www.barrons.com/articles/dow-drops-more-than-1-000-points-1440224896
Bloomberg, August 2015, http://www.bloomberg.com/news/articles/2015-08-20/existing-u-s-home-sales-rise-to-highest-since-february-2007