Although U.S. stock markets went into volatility mode in late August, plunging and surging hundreds of points at a time, following the long Labor Day weekend, the Dow Jones Industrial Average, NASDAQ and S&P 500 all finished on an upswing. Still, headlines touting concerns over the see-sawing activity of sell-offs and buy-ins continued to reign, attributing investor nervousness to China’s economic uncertainty and speculation over whether or not the Federal Reserve will raise interest rates next week.
But national, regional and local financial analysts, as well as the chief executive of the Port of Long Beach, all told the Business Journal that, essentially, the volatility of recent weeks isn’t cause for alarm. Rather, it represents nervousness about shifting economic dynamics abroad and a correction in what has been an unusually stable couple of years in the stock market.
“The equity volatility is being caused by a perception of slower global growth,” Steve Cochrane, managing director for Moody’s Analytics, said from his Pennsylvania office. Marc Doss, the regional chief investment officer covering California and Nevada for the wealth management group of Wells Fargo, agreed. “Ultimately it’s a concern, I would argue, about global growth. That’s the biggest worry,” Doss said.
In August, two events occurred in China that made investors squeamish: the country devalued its currency; and its Shanghai Composite Index tumbled 12.5 percent after three straight months of losses.
“It brings into question not only the growth of the Chinese economy but of the global economy as a whole, because China is linked to economies around the world,” Cochrane said.
“Are we going to fall into some kind of global recession because the Chinese economy is going to have a hard landing and not be able to grow as rapidly as they have?” Doss queried. “That’s the ultimate worry I would say that everybody has across the globe. And our answer is no, we don’t think we are going to fall into a global recession.”
Cochrane acknowledged that, if China’s economy were to grow at a slower than expected pace, it could have implications globally and in the U.S., but he doesn’t expect that to happen. “We haven’t baked that into our forecast,” he said.
Cochrane and Doss attribute China’s recent stock market downturn and its monetary devaluation to a longer-term shift in the country’s economic structure. Recent tumult has been caused by “emerging imbalances in the economy as it shifts from being an export-led and investment-led economy to a more domestically driven, consumer-led economy,” Cochrane explained.
“Ultimately the long-term, sustainable way to grow is to have a consumer-based economy,” Doss said, adding that China is trying to move towards this model.
Jon Slangerup, chief executive of the Port of Long Beach, closely monitors macroeconomic trends in China because so much of the port’s trade is done with China. During the first half of this year, about 52 percent of all imports coming through the port were from China, while about 46.5 percent of all exports were destined for China, he said. Imports from the country have decreased between about 5 to 6 percent in the past few years, he explained, because of a shift in China’s economy.
“China is clearly attempting to wean itself from export dependency into more of a consumer economy like we enjoy in the U.S.,” Slangerup said. “The United States has this amazing resiliency to its economy because we consume so much of what we make. . . . China sees that as the answer to its long-term stability.”
During his 20 years serving in international trade and logistics executive roles, Slangerup visited China numerous times, and observed the country’s transition to a consumer-based economy.
“In the last 10 years, it has really accelerated,” he said. “The issues with China are interesting because, if you think of it from a policy and macroeconomic perspective, China has been working very hard to build a consumer economy based on the influx of lots of people into traditional middle class roles,” he explained.
While that might mean the share of imports coming from China may decrease somewhat in coming years, Slangerup predicts those goods will still come in through West Coast ports to meet consumer demand – they’ll just come from other places. Because quality of life and wages in China are increasing, the country is looking to other countries to outsource its manufacturing – a trend that occurred in our own country and others like Japan, Slangerup noted. “For example, a significant amount of the Apple iPhone production went away from China to Brazil,” he pointed out.
There have actually been some upsides to slower global growth, which should also be a sign to investors that turmoil in China doesn’t necessarily mean an economic crisis is on the way, Cochrane said. “Slower global growth has also brought down the price of oil, so that actually has benefited consumers and offsets some of that negative hit from stock prices,” he said.
Slower growth has also meant that interest rates have remained very low, Cochrane noted. And, even if they are raised by the Fed either this month or in December, it isn’t likely to be much, Doss pointed out. “Everybody is so worried about the Fed and what they are going to do, and they made it pretty clear . . . that their move would be [a rate increase of] 25 basis points, so 0.25 percent would be their first move,” he said. Regardless of the small increase that’s expected, he said stock markets are likely to react negatively, at least initially, to any increase.
Low interest rates “make financing anything from buying a car to financing a mortgage cheaper,” Cochrane pointed out. “When you think about the positive impact from lower oil prices and the potential positive impact from slightly lower interest rates, that pretty much offsets what we might expect from the wealth effect created from lower equity prices,” he said. “In a way, it’s a bit of a wash.”
As far as the volatility the U.S. stock market has experienced in recent weeks, Brian Spinelli, chair of the investment committee of locally based fiduciary investment management firm Halbert Hargrove, believes it represents a shift to normalcy rather than a cause for panic. “We are getting back to what we consider more of a normal equity environment where volatility is present, versus what we have been in, which I would say was relatively low [volatility] and calm,” he said.
“From our standpoint, we tended to think that the volatility was overdue,” Spinelli explained. “We were expecting it . . . because we have been in a relatively stable market for the last few years with few setbacks or day-to-day jumps.”
Karen Codman, a Long Beach-based investment advisor, said that it has been more than 44 months since there has been a correction of 10 percent or more in the stock market. “The thing you have to realize is that markets go through cycles, and we haven’t had a proper correction,” she said. “So we were sort of due for this.”
While Codman said she expects market volatility to ease by the end of the month, Spinelli said it would continue long-term. “The next few years are going to be bumpy. That’s what we expect,” Spinelli said. “We expect returns to be somewhat more muted than what they have been in the past as well.”
While Spinelli said returns on stocks should be about 6 to 7 percent rather than the historic average of 9 to 10 percent in coming months, he noted that stocks are still a better investment than bonds at the moment, which aren’t fetching much more than 3 percent returns due to low interest rates. Doss agreed with this perspective. “When we are managing client portfolios . . . we continue to favor stocks over bonds in this environment,” he said.
“The thing that is hardest for investors now is dealing with the volatility that we face today,” Cochrane said. “One day the market is up, the next it is down, and these movements are quite sizeable. That makes it very difficult for investors.”