ARBOR WEALTH: Market corrections, commodity tailwinds and Alan Arkin
“Your career is not going to be one steady march upward to glory.” Actor Alan Arkin
Here are some things to consider about the Dow’s 5.8 percent decline last week. The Dow is down around 10 percent from its previous high in May, and this drop defines what is known as a market correction. It’s been almost four years since we experienced one. Historically, there has been a correction at least every 18 months or so.
For perspective, the current bull market was in the third longest streak without a correction in the last 50 years. So last week’s correction was the first in a while, and because of this historical anomaly, the downturn seems significant. Truth be told, though, many economists believed that the docile markets we’d grown accustomed to for the past year were likely to become more volatile as we neared the Federal Reserve’s decision on its well-publicized interest rate hike. Interest rates, although still likely to rise in the next six months, are low by anyone’s standards. Currently, rates are real, real, real low. When they’re raised, they’ll just be real, real low. Income producing assets like stocks, real estate, and, to a lesser extent, bonds, will probably still look attractive.
One immediate cause of the drop appears to be weak economic data coming out of China, including a weak Chinese PMI (Purchasing Manufacturer’s Index) reading of 47. Any reading below 50 indicates manufacturing contraction, while a reading above 50 indicates expansion. China’s flailing stock market, sudden devaluation of the yuan, and their rumored lowering of the banking reserve requirements likely snowballed investor perceptions that China’s long term growth is stagnating.
Thankfully, China’s stock market isn’t representative of their economy. Most companies in China are funded with debt instead of equity as in the U.S. Additionally, China’s devaluation of the yuan is a move to make it more market-oriented and not so tightly controlled by the government.
Exports to China from the U.S. make up less than 1 percent of our total, meaning U.S. exporters won’t be greatly impacted by the slowdown. Imports from China will actually be even cheaper as a result of the recent currency devaluation, a boost to American businesses and consumers.
In the world of commodities, China’s loss is America’s gain. All those materials that China was consuming during its construction boom, almost half of the world’s supply, are now a whole lot less expensive. Gas prices, home building costs, and the expense of powering and supplying factories will all likely decrease here as commodity prices fall. This is another tailwind to the already improving U.S. economic picture. Conversely, though, these commodity price swings have had negative impact on emerging markets, many of which are major commodities exporters.
Margaret R. McDowell, ChFC, AIF, a syndicated economic columnist, is the founder of Arbor Wealth Management, LLC, (850-608-6121 — www.arborwealth.net), a “fee-only” registered investment advisory firm located near Sandestin. This column should not be considered personalized investment advice and provides no assurance that any specific strategy or investment will be suitable or profitable for an investor.