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Market Recap – Global Stocks Fall Sharply

Market Digest – Week Ending 8/21

Global stocks fell sharply, driven by fresh fears of a slowdown in China. Much of the damage was done on Friday, when an early gauge of China’s factory activity came in below expectations and fell to a six year low. Oil and other commodities were also hit hard. Gold and Treasuries rallied as safe havens. Overshadowed by market activity, Greek Prime Minister Tsipras unexpectedly resigned, in an apparent bid to consolidate power in a September election and solidify the bailout package.

Weekly Returns:

S&P 500: 2,092 (-5.7%)
FTSE All-World ex-US: (-6.6%)
US 10 Year Treasury Yield: 2.04% (-0.16%)
Gold: $1,159 (+4.0%)
USD/EUR: $1.139 (+2.4%)

Major Events:

• Monday – Sprint said it would stop doing two year contracts in favor of customers leasing phones, following similar actions by Verizon and T-Mobile.
• Tuesday – Chinese stocks dropped 6% on investor concerns that the government was not doing enough to support shares.
• Tuesday – Greece and its creditors agreed to a new $96 billion bailout package. The agreement would ultimately be ratified on Friday, but political dissention about the program remains both inside and outside of Greece.
• Wednesday – Online lender Social Finance was said to raise about $1 billion at a valuation of roughly $4 billion.
• Thursday – Greek Prime Minister Alexis Tsipras resigned, clearing the way for elections to uphold the bailout deal.
• Friday – The price of US oil dropped below $40 for the first time since 2009.
• Friday – Stocks plummeted on global growth fears. The S&P 500 dropped 3.2%, moving solidly into negative territory for the year
• Friday – The preliminary Caixin China Manufacturing Purchasing Managers’ Index, a gauge of nationwide manufacturing activity, fell to a 77-month low in August of 47.1.

Our take:

The global stock market shed 6% of its value this week. That is a pretty big move and there’s no way to sugar-coat it. For many it felt even more severe than it was simply because the market has been so calm for so long. The S&P 500 is now down about 3% for the year. At no point was it ever up much more than that. In reality, it has been one of the most boring years in history for stocks.

That calm may be a thing of the past. We do feel some winds of change. For the last year, the best trade on Wall Street was momentum. Generally speaking, the narrow group of stocks that had been doing the best kept doing the best and the stocks that were out of favor continued to sink. In the last month, we’ve seen recent favorites get smacked around a bit. The biotech index is off 14% from its July peak and even Apple has seen declines sharper than the market. That is not necessarily unhealthy from a macro perspective but it should be a wake-up call for those who have heavily concentrated positions. The time to be greedy is early in a bull market, not six years deep.

There has not been a real correction in stocks since 2011. That is very unusual and we’ve been due for one. This may turn out to be it, or not. Even if it is, exiting stocks is unlikely to be the right move because it is too hard to know when to get back in. For example, there are a lot of parallels now to the 1998 emerging markets crisis. But even then, most of those who sold and felt short term pride were kicking themselves before long when market roared back.

The slow, steady ascent in stocks may be over. We hope you enjoyed it. But don’t give up on investing. Volatility can bring gains or losses. Meanwhile, holding cash is a guaranteed way to lose wealth to inflation – even at current low rates. A recession in China would be brutal for oil, commodity prices and emerging markets currencies. But they’ve already fallen a long way and there is only so far they can go. When it feels really bad, it is usually too late to sell. At some point, maybe not so far away, everything that feels awful to own right now will be the envy of the capital markets.

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