Litigation + Valuation Perspectives

Demystifying Valuation, Economic Damages + Forensic Accounting

Market Perspective

The markets have been extremely volatile in the past few weeks. We saw sharp declines in the markets in the beginning of last week only to turn around and end the week with a slight increase in the S&P 500 and Nasdaq indices and a slight decline in the Dow Jones Industrial Average. The S&P 500 and Dow Jones are both down year to date.

Michael Carlin, Managing Member of Wealth Management and valued team member of Henry & Horne , provided a calming perspective to his Clients last week which I found to be helpful personally as an investor in the markets and when talking to Clients. Below are excerpts from Michael’s commentary that I hope you find useful (statistics shown are as of August 24, 2015).

“Even with the market turmoil, I want to point out a few salient facts that should help maintain perspective and understanding, and start with a quick note first: Since March of 2009, the stock market has been on a long, sustained secular bull market, meaning the market rolls higher. Another way to look at it – we had the 4th longest stock market run higher in history.

Let’s review the fact set that is providing the fuel for this downturn:

  • There is concern the Federal Reserve will increase interest rates in September. Important to note, the Fed typically increases interest rates to normalize our economy, so inasmuch as it is viewed as a negative, a rate increase indicates our economy could/should handle a move higher. So even if the Fed increases rates in September (feels unlikely) it should come with the sense that our total economic outlook is better than reflected in the stock market. As we sit now, jobs look well, inflation remains low and under control, and U.S. Growth estimates still fall in the range of 2% to 2.5% for the year.
  • China, it’s all about China to some pundits. Today China is down 8%+. Since June, China is down 33%+. However, these move lower take back gains in the Chinese market earned early in the year. As of now, including this move lower, the Chinese market is actually up for the year by more than 8%+. Right now, there are fears that China is slowing which is proven by much slower economic numbers coming out of Shanghai over the past few weeks. The weakened growth in China lead some to ponder whether it was possible for China’s robust annual growth to slim down from its +6% growth prediction to maybe a contraction or negative growth figure. The only way to know for sure the extent of China’s stagnation will be to know the numbers as they come out over the coming months. The reality is that China’s middle class is supposed to reach 340 million people in China by 2016 which is about the size of the total U.S. population. Those people are going to have money to spend and will find ways to use their funds and keep economic activity moving forward. So, when things go bad in China, it certainly has an effect on our market, but let’s keep in perspective that it will not take the U.S. down to the same degree.
  • The world is experiencing a currency crisis as the U.S. Dollar strengthens. For nearly 40 years the U.S. dollar gradually endured a decade by decade weakness against the major currencies of the world. This trend halted suddenly as European countries experienced renewed fears over Greece on year ago. Since then, the U.S. Dollar moved 14% higher versus the Euro. Yet it wasn’t just the Euro, when the world experienced turbulence and turmoil they turned to the U.S. Dollar for stability. In turn, the U.S. Dollar moved higher by 20% to the Canadian dollar over the past year, and up 10% compared to most emerging countries like the Indian Rupee and Thai Baht. The last time we experienced a currency meltdown similar to this was the 1997 Asian currency crisis. At that time, the U.S. Stock market dropped about 15% feeling the effects of contagion that started in East Asia. Once the U.S. stock market found a bottom around October of 1998, the market was up another 20% in the year following.
  • When markets drop 10% or more, statistics show that it usually takes about 5 months to complete the slide lower. Our hyper sensitive market dropped this amount in a few weeks. It makes some feel it could get much worse quickly which is not based on fact. What the timing does indicate is that it could be a sustained uneasy market for a period of the next few months.”

In summary, while a volatile market environment can create anxiety, it can also be an opportunity to find value in markets or stocks that have gone down too much. It’s important to be patient, not panic, and maintain a long-term perspective.

By Cindy Andresen, ASA