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The Market Downturn Is Here, Now What?

The document summarizes recent market volatility and provides context. It states that short-term market declines are normal even in bull markets. Recent low volatility may have increased investor sensitivity. Concerns over China's economic slowdown and currency devaluation, lower oil prices, and the possibility of a US interest rate hike have contributed to increased volatility. However, US economic fundamentals remain strong, suggesting further stock market gains despite ongoing short-term uncertainty and volatility.

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702 views

The Market Downturn Is Here, Now What?

The document summarizes recent market volatility and provides context. It states that short-term market declines are normal even in bull markets. Recent low volatility may have increased investor sensitivity. Concerns over China's economic slowdown and currency devaluation, lower oil prices, and the possibility of a US interest rate hike have contributed to increased volatility. However, US economic fundamentals remain strong, suggesting further stock market gains despite ongoing short-term uncertainty and volatility.

Uploaded by

dpbasic
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
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LPL RESEARCH

WEEK LY
MARKET
COMMENTARY

KEY TAKEAWAYS
As a bull market matures
over the second half of an
economic expansion,
periods of increased market
volatility are likely to
become more common.
Periods of volatility bouts
will likely create a more
challenging environment for
investors, and in the short
term, sentiment can control
markets as investor
sensitivity to certain
risks spikes.
We believe the
macroeconomic
fundamentals and the
dynamism of American
corporations are likely
to drive further stock
market gains.

August 24 2015

THE MARKET DOWNTURN IS HERE,


NOW WHAT?
Burt White Chief Investment Officer, LPL Financial
Jeffrey Buchbinder, CFA Market Strategist, LPL Financial

August brings with it the end of summer, but in recent years, bouts of
stock market volatility have been common. It is quite normal for stock prices
to decline at some point almost every year. Since 1980, the stock market, as
measured by the S&P 500 Index, declined into negative territory at some point
during the calendar year in every year except four. Furthermore, the average peak
to trough decline during any year is 15% even though stocks finish the year higher
70% of the time.
At times like these we need to remind ourselves that market downturns are part
of investing. The length of the current bull market, the lack of notable pullbacks,
and the length of time without a correction may have increased investor sensitivity
to pullbacks. Four years have passed since the last correction (a decline of more
than 10%) in August 2011 and two of the four years (mentioned above) without
a decline into negative territory were recent: 2012 and 2013. Recent history may
have provided a false sense of security.
As we noted in our Outlook 2015: Some Assembly Required, as a bull market
matures over the second half of an economic expansion, periods of increased
market volatility are likely to become more common.
A combination of worries has led to the latest episode of market
turbulence, including:

CHINA FEARS
Chinese stock market gains were simply unsustainable, as was the yuans
currency strength. The torrid pace of gains over the first half of 2015 was ripe for
a correction. Despite the severity of the correction Chinese equity markets were
still in positive territory year to date, as of Friday, August 21, 2015, although more
volatility could change that status quickly.
Chinese stock market action is likely to have a limited impact, if any, on the global
economy. Only 9% of the Chinese public invests in equities compared to a much
higher 55% in the United States. Potential wealth effects, either positive or
negative, from equity market changes are therefore much less impactful.

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Member FINRA/SIPC

WMC
Furthermore, economic linkages with China exist, but
are much less significant than the U.S.s key trading
relationships. U.S. trade with Europe and Japan
combined is roughly 4 times larger than U.S. trade
with China. And U.S. trade with both Canada and
Mexico is greater than our trade with China.

LOWER OIL PRICES


Oil price declines weigh heavy on the energy
industry. However, unlike past years, the decline
in oil prices is a function of oversupply, and not
weakening demand. Over the second half of 2015,
energy companies will have dealt with lower oil
prices for a year and profit declines will likely
slow, removing a headwind from broader earnings
growththe key driver of stock prices over the
long run. Excluding the energy sector, S&P 500
company earnings grew 9% year over year in the
second quarter of 2015 and we believe the overall
earnings picture will improve over the remainder
of 2015.

Regarding Chinas currency, due to its peg to the


strong U.S. dollar, the yuan appreciated 11% versus
other emerging market currencies, 19% versus
the yen, and 10% versus the euro in 2015 prior to
the early August devaluation. The relative strength
of the Chinese yuan created a strong headwind
for Chinas export economy. Poor communication
from Chinese officials only compounded investors
fear. Bold attempts to stem the markets decline
earlier this summer had only mixed success and the
central banks statement announcing the currency
change was extremely briefboth factors eroding
confidence. Concern over a modest 3% yuan
devaluation, in light of a significant multi-year rise, is
overdone, in our view. This is just another step in the
Chinas long history of overtly managing its economy,
especially now as it transitions to becoming more
consumer-driven.

THE FEDS FIRST RATE HIKE


The possibility of a Federal Reserve (Fed) interest
rate increase in September, even if low, has added
to investors concerns. The Fed is unlikely to be
hasty and the release of its July meeting minutes
suggested some apprehension over a potential
September rate hike. We believe the Fed will take
note of global events and hold off from raising
interest rates.

China is likely to continue with a heavy hand but its


next move is likely to be another policy easing move
either in the form of another interest rate cut or
additional regulatory relief.

LOW RECENT VOLATILITY MAY HAVE INCREASED INVESTOR SENSITIVITY

S&P 500 Negative Daily Returns


0%

Pullback
-10

Correction

-20
-30
-40

Bear Market

-50
-60
83

85

87

89

91

93

95

97

99

01

03

05

07

Source: LPL Research, FactSet 08/14/15


Indexes are unmanaged and cannot be invested into directly. Past performance is not indicative of future results.
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Member FINRA/SIPC

09

11

13

15

WMC
Despite ongoing fears, economic data still points
to continued U.S. expansion. Robust auto and
home sales data, the two largest purchases most
consumers will make, argue strongly against a
recession. Consumer spending accelerated after
a slow start to 2015 and monthly jobs gains have
exceeded 200,000 in all but 3 months over the
past 18one of the most consistent stretches on
record. The economic recovery has been gradual
by historical comparison, but the silver lining is that
the slow pace has not produced the excesses that
typically accompany the end of a bull market or
economic expansion. It is these excesses, not age,
that end bull markets.

INFORMATION VOID
Unfortunately, there is limited economic data until
the August jobs report on September 4, 2015,
which suggests the information void that may
have sparked panicky selling in recent days may
linger. The Kansas City Feds annual Jackson Hole

Conference, which starts Friday, usually provided


insight into monetary policy but Fed Chair Yellen
is not attending this year. However, Fed Vice Chair
Stanley Fischer will speak on inflation on Saturday,
August 29, 2015, and provide clues as to the
latest Fed thinking. Fischer is known as a dove
(someone who favors more accommodative
monetary policy), and market friendly comments
may add to the ongoing decline in September rate
hike expectations.
Nonetheless, as long as earnings continue to
grow, pullbacks such as the current one can
be opportunities for investors with longer-term
horizons. We continue to monitor underlying
market conditions for potential financial or
economic stress. Bouts of volatility will likely create
a more challenging environment for investors and
in the short term sentiment can control markets as
investor sensitivity to certain risks spike, but we
believe that the macroeconomic fundamentals and
the dynamism of American corporations are likely
to drive further stock market gains. n

IMPORTANT DISCLOSURES
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To
determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee
of future results.
The economic forecasts set forth in the presentation may not develop as predicted and there can be no guarantee that strategies promoted will be successful.
Investing in stock includes numerous specific risks including: the fluctuation of dividend, loss of principal, and potential liquidity of the investment in a falling market.
Currency risk is a form of risk that arises from the change in price of one currency against another. Whenever investors or companies have assets or business
operations across national borders, they face currency risk if their positions are not hedged.
Commodity-linked investments may be more volatile and less liquid than the underlying instruments or measures, and their value may be affected by the performance
of the overall commodities baskets as well as weather, geopolitical events, and regulatory developments

INDEX DESCRIPTIONS
The Standard & Poors 500 Index is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in
the aggregate market value of 500 stocks representing all major industries.
This research material has been prepared by LPL Financial.
To the extent you are receiving investment advice from a separately registered independent investment advisor, please note that LPL Financial is not an affiliate of and
makes no representation with respect to such entity.
Not FDIC or NCUA/NCUSIF Insured | No Bank or Credit Union Guarantee | May Lose Value | Not Guaranteed by Any Government Agency | Not a Bank/Credit Union Deposit

RES 5202 0815 | Tracking #1-413601 (Exp. 08/16)

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Member FINRA/SIPC

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