Market Currents

• Lending credence to the popular adage “sell in May and go away”, the S&P 500 fell into correction territory (characterized by a 10% pullback from its highs seen in late May) for the first time since 2011, as a rout in global equity markets deepened.

• Several wild and volatile swings marked the summer doldrums. With many traders away from their desks, the reduced volume resulted in greater volatility as transactions had an exaggerated impression on stock fluctuations.

• The Chinese government unveiled a myriad of stimulus initiatives over the past few months in a bid to support their flailing stock market and a slowing economy. Their latest move of devaluing the yuan against the U.S. dollar sent shock waves across global markets, reviving fresh accusations of currency manipulation and sparking fears of a currency war.

• In contrast, U.S. second quarter GDP growth was revised sharply higher to a 3.7% pace. The expansion was broad-based, led by business investment, inventories, government and consumer spending.  Other recent reports in unemployment, consumer confidence, retail sales, and home building all suggest underlying momentum in domestic economy is healthy.

• It appears increasingly like that the Fed will finally move to hike interest rates. Despite investor anguish over the change in Fed policy, we expect any additional rate moves to be cautious, and deliberate.  Meanwhile, strong foreign demand will likely keep our Treasuries bond yields low.

• We have been monitoring a narrowing stock market. Even though the broader markets only recently entered correction territory, the average stock has been enduring a silent correction.  Stocks have struggled for traction since May, and it is likely the current selling downdraft has a bit further to run, solely on momentum.

• Our view, however, is that we are much closer to the end than the beginning of this correction. An exit from the seasonally weak months of summer, and clarity on Federal Reserve policy, should lend some support to stocks.