October 5, 2015
The Markets
Well, third quarter was a humdinger.
It began with the first International Monetary Fund
(IMF) default by a developed country (Greece) and finished with Hurricane
Joaquin possibly headed toward the east coast. In between, China’s stock market
tumbled, the Federal Reserve tried to interpret conflicting signals, and trade
growth slowed globally.
After such a stressful quarter, we may see an uptick
in the quantity of alcoholic beverages consumed per person around the world.
That number had declined (along with economic growth in China) between 2012 and
2014, according to The Economist.
No Grexit – for
now
Despite defaulting on its IMF loan, rejecting a
multi-billion-euro bailout plan, and closing its banks for more than two weeks,
Greece was not forced out of the Eurozone. Instead, Europe cooked up a deal
that left the IMF unhappy and analysts shaking their heads.
The Economist reported the new deal for Greece was an exercise in
wishful thinking. The problem is the deal relies on “the same old recipe of
austerity and implausible assumptions. The IMF is supposed to be financing part
of the bailout. Even it thinks the deal makes no sense.” It’s a recipe we’re
familiar with in the United States: When in doubt, defer the problem to the
future.
A downturn
in China
Despite
reports from the Chinese government that it hit its economic growth target (7
percent) on the nose during the first two quarters of the year, The Economist was skeptical about the
veracity of those claims. During the first quarter:
“Growth in industrial production was the weakest since
the depths of the financial crisis; the property market, a pillar of the
economy, crumbled. China reported real growth (i.e., after accounting for
inflation) of 7 percent year-on-year in the first quarter, but nominal growth
of just 5.8 percent.”
That statistical sleight of hand implies China
experienced deflation early in the year. It did not.
On a related note, from mid-June through the end of
the third quarter, the Shenzhen Stock Exchange Composite Index fell from 3,140
to about 1,716, according to BloombergBusiness.
That’s about a 45 percent decline in value.
Red light,
green light at the Federal Reserve
Green light: employment numbers. Red light: consumer
prices, inflation expectations, wages, and global growth. Late in the quarter,
the Federal Reserve decided not to begin tightening monetary policy. According
to Reuters, voting members of the
Federal Open Market Committee (FOMC) decided uncertainty in global markets had
the potential to negatively affect domestic economic strength.
They may have been right. The Wall Street Journal reported, although unemployment remained at
5.1 percent, just 142,000 jobs were added in September. That was significantly
below economists’ expectations that 200,000 jobs would be created. The Journal suggested the labor market
has downshifted after 18 months of solid jobs creation.
Global trade
in the doldrums
The global economy isn’t as robust as many expected it
to be. According to the Business Standard,
the World Trade Organization (WTO) lowered its forecast for global trade growth
during 2015 from 3.3 percent to 2.8 percent. Falling demand for imports in
developing nations and low commodity prices are translating into less global
trade. Expectations are trade growth will be 3.9 percent in 2016, which could
help support global economic growth.
Data as of 10/2/15
|
1-Week
|
Y-T-D
|
1-Year
|
3-Year
|
5-Year
|
10-Year
|
Standard & Poor's 500 (Domestic Stocks)
|
1.0%
|
-5.2%
|
0.3%
|
10.5%
|
11.4%
|
4.8%
|
Dow Jones Global ex-U.S.
|
0.7
|
-8.6
|
-10.3
|
0.8
|
0.0
|
0.9
|
10-year Treasury Note (Yield Only)
|
2.0
|
NA
|
2.4
|
1.6
|
2.5
|
4.4
|
Gold (per ounce)
|
-0.5
|
-4.9
|
-5.9
|
-13.7
|
-2.8
|
9.4
|
Bloomberg Commodity Index
|
-0.7
|
-15.8
|
-25.7
|
-16.1
|
-8.7
|
-6.9
|
DJ Equity All REIT Total
Return Index
|
1.5
|
-3.3
|
9.2
|
9.4
|
11.6
|
6.8
|
S&P 500, Dow Jones Global ex-US, Gold, Bloomberg
Commodity Index returns exclude reinvested dividends (gold does not pay a
dividend) and the three-, five-, and 10-year returns are annualized; the DJ Equity
All REIT Total Return Index does include reinvested dividends and the three-,
five-, and 10-year returns are annualized; and the 10-year Treasury Note is
simply the yield at the close of the day on each of the historical time
periods.
Sources: Yahoo! Finance, Barron’s, djindexes.com,
London Bullion Market Association.
Past performance is no guarantee of future results.
Indices are unmanaged and cannot be invested into directly. N/A means not
applicable.
change is coming. America’s
share of the global economy is potent. Our country accounts for 16 percent
(after being adjusted for currency differences) of the world’s gross domestic
product (GDP) and 12 percent of merchandise trade. According to The Economist, we dominate “the
brainiest and most complex parts of the global economy.” Our presence is strong
in social media, cloud computing, venture capital, and finance. In addition,
the dollar is the world’s dominant currency.
While
the view from the top is pleasing, we may not be there forever. The Economist explained:
“In
the first change in the world economic order since 1920-45, when America
overtook Britain, [America’s] dominance is now being eroded. As a share of
world GDP, America and China (including Hong Kong) are neck and neck at 16
percent and 17 percent respectively, measured at purchasing-power parity. At
market exchange rates, a fair gap remains with America at 23 percent and China
at 14 percent… But any reordering of the world economy’s architecture will not
be as fast or decisive as it was last time…the Middle Kingdom is a
middle-income country with immature financial markets and without the rule of
law. The absence of democracy, too, may be a serious drawback.”
It
may be hard to believe, in light of recent economic and market events in China,
but change is on its way. Regardless, the influence of the United States should
continue to be powerful well into the future.
Weekly Focus – Think About It
“Governing a great nation is like cooking
a small fish – too much handling will spoil it.”
--Lao Tzu, Chinese philosopher
Leif M. Hagen
Leif M. Hagen, CLU, ChFC
LP Financial Advisor
Securities
offered through LPL Financial Inc.,
Member
FINRA/SIPC.
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* This newsletter was
prepared by Peak Advisor Alliance. Peak Advisor Alliance is not affiliated with
the named broker/dealer.
* The Standard & Poor's
500 (S&P 500) is an unmanaged group of securities considered to be
representative of the stock
market in general. You cannot invest directly in this index.
* The Standard & Poor’s
500 (S&P 500) is an unmanaged index. Unmanaged index returns do not reflect
fees,
expenses, or sales charges.
Index performance is not indicative of the performance of any investment.
* The 10-year Treasury Note
represents debt owed by the United States Treasury to the public. Since the
U.S.
Government is seen as a
risk-free borrower, investors use the 10-year Treasury Note as a benchmark for
the long-term bond market.
* Gold represents the
afternoon gold price as reported by the London Bullion Market Association.
The gold price is set twice
daily by the London Gold Fixing Company at 10:30 and 15:00 and is expressed in
U.S. dollars per fine troy ounce.
* The Bloomberg Commodity
Index is designed to be a highly liquid and diversified benchmark for the
commodity futures market. The Index is composed of futures contracts on 19
physical commodities and was launched on July 14, 1998.
* The DJ Equity All REIT
Total Return Index measures the total return performance of the equity
subcategory of the Real Estate Investment Trust (REIT) industry as calculated
by Dow Jones.
* Yahoo! Finance is the
source for any reference to the performance of an index between two specific
periods.
* Opinions expressed are
subject to change without notice and are not intended as investment advice or
to predict future performance.
* Economic forecasts set
forth may not develop as predicted and there can be no guarantee that
strategies promoted will be successful.
* Past performance does not
guarantee future results. Investing involves risk, including loss of principal.
* You cannot invest directly
in an index.
* Consult your financial
professional before making any investment decision.
* Stock investing involves
risk including loss of principal.
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Sources:
http://www.economist.com/news/leaders/21656662-whatever-its-outcome-greek-crisis-will-change-eu-ever-europes-future-greeces (or go to http://peakclassic.peakadvisoralliance.com/app/webroot/custom/editor/10-05-15_TheEconomist-Europes_Future_in_Greeces_Hands-Footnote_1.pdf)
http://www.worldbank.org/en/publication/global-economic-prospects/regional-outlooks/Global-Economic-Prospects-June-2015-East-Asia-and-Pacific-analysis#5 (or go to http://peakclassic.peakadvisoralliance.com/app/webroot/custom/editor/10-05-15_WorldBank-Global_Economic_Prospects-East_Asia_and_Pacific-Footnote_2.pdf)
http://www.economist.com/news/business/21659754-booze-around-world (or go to http://peakclassic.peakadvisoralliance.com/app/webroot/custom/editor/10-05-15_TheEconomist-Booze_Around_the_World-Footnote_3.pdf)
http://www.economist.com/news/leaders/21657806-deal-between-greece-and-europe-averts-one-disaster-and-hastens-next-pain-without-end (or go to http://peakclassic.peakadvisoralliance.com/app/webroot/custom/editor/10-05-15_TheEconomist-Pain_Without_End-Footnote_4.pdf)
