Blog

Is This The Big One (Financially Speaking)? Probably Not.

Webinar Replay

On Tuesday, August 25, PMC hosted a special webinar featuring commentary on the state of the markets and key takeaways for advisors.

Markets are going off a cliff, but economies and companies are still prospering.

There is only one question to ask on this manic Monday: Is the global market turmoil that now has spread to Wall Street a summer squall—a painful but ultimately transitory surge in volatility—or is it the first crack in a shaky global edifice that is crumbling?

First, let us give the naysayers their due. The argument that we should be very, very worried about what lies ahead is serious, and it deserves serious attention. The Dow Jones Index suffered its steepest losses since 2008. On Thursday and Friday alone, U.S. listed stocks lost more than $1 trillion; in the first minutes of trading on Monday morning, they lost even more. Global markets have been equally dismal. In the past month, another $1 trillion has flowed out of emerging markets, and China’s indices have seen double-digit sell-offs. Shares on the Shanghai exchange, not a real proxy for the China economy but real nonetheless, lost nearly 9% on Sunday night. German and French shares also lost 7% last week, and fell another 4% on Monday.

For some time, both pundits and professionals in market land have been on edge. They are unsure about when the Federal Reserve might raise short-term interest rates, and are uncertain whether the general global economic landscape is conducive to a further increase in corporate profits and stock prices. So the sudden sell-off, combined with the continued collapse of oil prices and the still remarkably low bond yields, has brought the doomsayers out of the shadows and onto center stage once more.

And yet. And yet.

The world has muddled through much better than the grim reapers of market land thought possible over the past years, and today, the global situation is arguably better than at any point in the past few years. The United States has managed steady growth, steady employment improvement, and even some signs of modest wage growth: Walmart is raising wages, and several cities are passing minimum wage laws. Europe not only hasn’t imploded, but also, aside from Greece is showing many signs of a nascent recovery, albeit with untenably high unemployment in countries such as Italy and Spain.

China is a wildcard, but is still growing at a robust pace. Further, the composition of that growth is likely of much higher quality than in the past: it's coming from a real middle class and domestic activity rather than exports and government spending. On Monday morning, the CEO of Apple, Tim Cook, made a bold statement about the strength of Apple’s business in China as a countersignal to the widespread belief that the Chinese economy is on the verge of imploding. And emerging market economies suffering from sagging oil and commodity prices invested heavily in education and infrastructure during their flush years. They also are, for the most part, ruled by democratic governments accountable for continued reform, even if some of those governments face glaring questions about past errors (such as the massive corruption scandals surrounding Dilma Roussef in Brazil).

And remember that larger companies remain immensely profitable and continue to grow at a rate well above that of most national economies. Although growth slowed in recent months largely because of the drag of energy companies, companies are—for better or worse—the most dynamic elements in the global economy. If any marginal rationality to the investing world exists, it makes sense that money will flow to them, and that the future of those investments is at least not bleak.

This sell-off may not be over, and further downside would hardly be a surprise. But the issue is whether this portends other pain and a long period of low or negative returns.

There are serious arguments that this is merely the first crack—the tremor before The Big One. One analyst wrote a long and thoughtful piece with the headline of "Dow 5,000? Yes it could happen". That would be a 70% decline and assuredly be part of a wider global sell-off that would obliterate tens of trillions of dollars of paper wealth. It would also be a steeper plunge than the one from late 2008 into March of 2009. But the ingredients are there: valuations are higher than 20th century norms; emerging markets that depended on a hungry China consuming raw materials are in a deep bind as that appetite diminishes and prices collapse; Europe and Japan are caught in a deflationary growth trap with shrinking populations and expanding safety net costs; China may be trying to transition from a manufacturing to a consumer economy, but it is clear that the export engine has stalled, and nothing yet has replaced it fully; and the United States is eking out low-level growth based on fewer workers, technology, and accommodative central banks.

This all looks bleak, but it is not the only picture. The bottom line is that for the past few years, financial markets have outperformed real-world economies. This year, many national economies are doing well while financial markets are either flat or down. The universe certainly can handle such a year, and investors should, too. The noise that negatively pervades financial commentary should not obscure the fact that net-net, much of the developed world has been rather stable, as has much of the world overall.

We have been in a period of extremely low volatility, and now we are reminded that markets are not always, or even usually, placid. This is a vital moment to communicate, to answer questions, and to explain the pros and cons of being more defensive or being more active. For the moment, this is a squall—severe sharp and sudden, but a squall nonetheless. It is imperative to monitor, but a bad time to act impulsively. The best opportunities often arise during these deep sell-offs, even as the risks appear higher. Stay tuned.

Advisor Take-Away:

  • This recent turmoil and volatility is a reminder that markets don't always go up or follow a predictable pattern.
  • There are solid growth underpinnings in both the U.S. and global markets.
  • While China has some issues, it is transitioning toward a consumer-based economy which could, over time, become conducive to that economy's prosperity and stability.

Featuring

Articles By This Author

The Envestnet Edge, May/June 2018 Video: Five (Investing) Rules To Live By The Envestnet Edge, March/April 2018 Video: Buy The Dips Video: No Place Like Home? Market Bias Perceptions and Realities The Envestnet Edge, February 2018 The Envestnet Edge, January 2018 Video: Raging or Aging: How Much Longer Will the Bull Last? Webinar Replay: 2018 Market Outlook The Envestnet Edge, December 2017 Video: Bitcoin, Bubbles, and the Bigger Picture The Envestnet Edge, November 2017 Video: Taxes are certain, but don't obsess about tax reform The Envestnet Edge, October 2017 Video: Time to stock up on growth or value? The Envestnet Edge, September 2017 Video: Time To Take A (Measured) Risk? The Envestnet Edge, July/August 2017 Video: Bitcoin: Buy Or Buyer Beware? The Envestnet Edge, June 2017 Video: FANG, FAAMG: Too Big a Bite of the Market? The Envestnet Edge, May 2017 Video: Invest "As If" The Envestnet Edge, April 2017 Video: What To Do In Quiet Markets The Envestnet Edge, March 2017 Video: Bull Or Bear: Should Investors Still Care? PMC Weekly Review - March 10, 2017 The Envestnet Edge, February 2017 Video: Separating markets from politics, is it really a "Trump rally"? The Envestnet Edge, January 2017 Video: Investing in Trump’s Economy? Proceed With Caution The Envestnet Edge, December 2016 Video: Have We Only Just Begun? The Envestnet Edge, November 2016 Video: Rotations, Reversals, Rising Rates: A Time to Reposition Post-Election, Will Markets and Portfolios Emerge Winners or Losers? Webinar Replay: Post-Election Winners and Losers The Envestnet Edge, October 2016 Video: In a 2-2-2 world, look for modest economic growth and expansion PMC Weekly Review - September 16, 2016 The Envestnet Edge, September 2016 Video: Diversification is working in 2016 (so far) The Envestnet Edge, July/August 2016 Video: Valuations: it's all relative Brexit: Plunging into the Unknown? The Envestnet Edge, June 2016 Video: Equity valuations and bond yields: reach no further PMC Weekly Review - June 17, 2016 The Envestnet Edge, May 2016 Video: Hitting singles: a measured approach for this investing season The Envestnet Edge, April 2016 Video: Investing with impact: increasingly a matter-of-fact Video: In this election cycle, will investors be winners or losers? The Envestnet Edge, March 2016 PMC Weekly Review - March 11, 2016 Video: In a low-growth world, less could be more The Envestnet Edge, February 2016 The Envestnet Edge, January 2016 Video: Markets are a mess, but don't jump to conclusions yet A Most Challenging Year Video: Interest Rates and Energy: The Highs and Lows of Year-End The Envestnet Edge, December 2015 The Envestnet Edge, November 2015 Video: We'll always have Paris The Envestnet Edge, October 2015 Video: Politics and the markets: déjà vu all over again? Video: China, Commodities, and Crisis: What's Next for Emerging Markets? The Envestnet Edge, September 2015 PMC Weekly Review - September 11, 2015 Is This The Big One (Financially Speaking)? Probably Not. The Envestnet Edge, August 2015 Video: In a "meh" market, look again at U.S. stocks The Envestnet Edge, July 2015 Video: Is this the Big One? What to do in a financial crisis Don't Worry About China Don’t Believe the Hype About Greece The Greek Catastrophe Is Finally Here (Unless It Isn’t) The Envestnet Edge, May/June 2015 Video: When Following the Herd is Risky, Where is the Safety? The Envestnet Edge, April 2015 Video: The End of Short-Termism is Long Overdue PMC Weekly Review - April 24, 2015 The Envestnet Edge, March 2015 Video: Keep Your Friends Close and Your Robo-Advisor Closer The Envestnet Edge, February 2015 Video: The Return of the Comeback: Is 2015 the Year for International Stocks? PMC Weekly Review - February 13, 2015 Why the Jobs Report Means Diddly Don’t Turn America Into Europe PMC Weekly Review - January 23, 2015 Video: Active and Passive: The Yin and Yang of Investing The Envestnet Edge, January 2015 Will Politics in 2015 Catch Up with the Economy? Video: Our Perspective on 2015: Maintain Yours The Envestnet Edge, December 2014 PMC Market Commentary: December 12, 2014 No, This Is NOT the '90s Economy Again PMC Market Commentary: November 14, 2014 Video: 2014 U.S. Midterms: A Win for Stocks? The Envestnet Edge, November 2014 Whose Economy Will It Be in 2016? PMC Market Commentary: October 17, 2014 Video: Special Video Commentary: Market Volatility and Fundamentals The Envestnet Edge, October 2014 Video: You Know What’s Not Sustainable? Ignoring the Opportunity in Impact Investing Don’t Panic! PMC Market Commentary: October 10, 2014 Greenberg’s Folly Naomi Klein Is Wrong PMC Market Commentary: September 26, 2014 Subprime Loans Are Back! The Envestnet Edge, September 2014 Video: When it Comes to Interest Rates, Who Says What Comes Down Must Go Up? PMC Market Commentary: September 12, 2014 Why Indie Bookstores Are on the Rise Again The Fed Is Not As Powerful As We Think PMC Market Commentary: August 22, 2014 Americans' Sour Mood on the Economy Doesn't Square with the Fact The Envestnet Edge, August 2014 Video: The World is in Crisis... the Markets are not PMC Market Commentary: August 8, 2014 PMC Market Commentary: July 25, 2014 Punitive Damages Video: Market Valuations and The Theory of Relativity The Envestnet Edge, July 2014 Don’t Kill the Export-Import Bank. Clone It. How India’s Economic Rise Could Bolster America’s Economy Video: Separating Risk from Reality PMC Market Commentary: June 27, 2014 No Sex Please, We're French PMC Market Commentary: June 13, 2014 The Envestnet Edge, June 2014 PMC Weekly Market Review, May 23, 2014 The Envestnet Edge, May 2014 Don't Bet on Rising Wages PMC Market Commentary: May 9, 2014 The Sharing Economy: Why Are So Many So Afraid? PMC Market Commentary: April 25, 2014 The Obsession with CEO Pay Won't Help the Middle Class PMC Market Commentary: April 11, 2014 Time to Face Reality: Our Unemployment Problems Are Structural PMC Market Commentary: March 28, 2014 In Defense of Relentless Optimism The "Made in China" Fallacy Forget GDP - Use Big Data