Recent events taking place overseas at the end of the second quarter have provided a reminder as to how connected we are on a global basis. From a quantitative standpoint, we have experienced increasing correlations among many countries. This must be taken into consideration when evaluating the economic landscape of certain regions in the world and their possible impact on the U.S. economy and capital markets. Even though Wall Street and the media continue to place bets on the timing and magnitude of the rate increase within the U.S., we must redirect our attention to Greece and China.
Greece – We were not surprised by the “no” vote over the past weekend. As mentioned at our Round Table Discussion (RTD) event, we feel that a “Grexit” should be a non-issue since it should not have a significant impact on Europe’s steady emergence from recessionary conditions. It is really a “no win” situation either way. If Greece stays, there is no real solution to the ongoing debt crisis. If Greece leaves, the world is uncertain about immediate fallout and the future possibility of other countries following suit. We do remain positive on Europe but expect near-term volatility due to uncertainty.
China – After experiencing a 150%+ run-up in their stock market over the past 12 months, we feel the recent drop of approximately 30% is only the beginning of more problems to come. The government’s announcements of various plans/guidelines to stem the selloff have provided temporary reprieves before succumbing to doubt (not to mention the methods being utilized are worrisome to say the least). As expressed at the RTD, our concern has been with China’s debt market and the softening trend in their GDP growth projections. We see significant downside risk should China’s economy reach a point where it can no longer cover debt payments. Combining this bond scenario with China’s shaky equity markets can provide a perfect storm in the downturn of China’s economy. Of course, let us not forget the overcapacity issue with real estate. We prefer staying away from China and recommend taking a cautious approach on the surrounding emerging markets.
United States – Although economic indicators can be mixed at times, the overall consensus remains positive. As this trend continues, expect the Fed to increase interest rates sometime in the future. We believe the rate increase will be minor at 25 bps, but we are not fixated on the timing. The determination of interest rates by the Fed should be a fluid process based on economic conditions, but everyone is obsessed with predicting when the “blast-off” will occur. At times, this media driven obsession feels like Vegas setting up odds to see which Wall Street professional is making the right call. Also note that with possible global threats to the U.S. economy, we do not expect interest rates to spike and we believe the next interest rate cycle may be shortened.
The impact of our commitment to evaluating geo-political events, macro-economic factors and their influence on portfolio management decisions is truly felt when you need it most – during times of market volatility and uncertainty. Please contact your consultant should you have any questions regarding your portfolio.
We wish you the best as you enjoy the rest of the summer and hope to see you at one of our events this fall.
