The stock market this week is not for the faint of heart. Markets shed nearly $1.8 trillion in wealth over the span of three trading days. You have to go all the way back to 2011 to find another rout that bad. Then on Tuesday the market came roaring back, up nearly 400 points in early trading.
The volatility is not over; this is just the warm up for what’s going to be a really bumpy late summer and fall for investors. Expect to see more ups and downs until we get to the holidays. Here’s what’s going to be keeping market analysts up nights the rest of the year.
If you think our market is rough, you should see what’s happening in China. U.S. markets bounced back after their death drop on Monday, but China just kept on sliding. To be clear, it’s not just China’s stock market that’s falling, Chinese markets are imploding because China’s economy itself is shrinking. Perhaps “shrinking” isn’t exactly the right term. The expectations of 10%-15% growth became so fixed among global investors that dropping to 5%-7% seemed like a contraction. The net effect on investment was exactly the same.
Commodities, if you remember, were what kicked off this whole mess we’re in right now. The big commodity causing all the problems is oil, but the same can be said for virtually any industrial raw material. What’s driving commodity prices lower is a strong dollar. Commodity trades are denominated in dollars. Hence, when dollars are pushed higher, commodity prices adjust by moving lower. When the Chinese Central Bank devalued its currency, the yuan, it pushed the dollar even higher in global currency markets. So, just when things were darkest for oil prices, the People’s Bank in China pushed the situation over to pitch black.
Home prices are up 4%-7% this year, depending upon where you live. That kind of price inflation in homes is unsustainable and, at some point, this new housing bubble is going to pop. Right now home prices are letting consumers feel good and that’s keeping the current market crash from going even deeper. Yet home prices themselves could suddenly implode if lenders get spooked by high prices, triggering another housing crisis which would certainly cause new problems for equity markets.
The Federal Reserve’s hopes for an interest rate increase were on the ropes early this week when the stock market imploded. But on Tuesday markets recovered some of the lost ground and that will certainly embolden the interest rate hawks on the Fed board. The problem for the Fed, as we discussed previously, is the strong dollar. Raising interest rates is only going to make that already bad problem worse. If it goes on long enough, a strong dollar will impact U.S. goods and services sold overseas; that’s already happening. So far that hasn’t significantly hurt the U.S. jobs picture but it will force more of those jobs into low paying service jobs instead of higher-paying manufacturing jobs which will flow to the currency cheaters like China. With the unemployment rate at 5.3% and hiring staying brisk, the Fed still has the green light for interest rate bumps, even though now would be the worst possible time to implement them.
This is most definitely going to be a bumpy late summer and fall for small investors. This is good opportunity to make sure your investments are well diversified and include high quality hard assets and bond funds. Definitely take time to rebalance your portfolio but hold off a couple months before you do that. Right now is not a great time to be selling stocks.