August 2015 Market Update
Although globalization has its benefits, one of the drawbacks is the interconnectivity of global equity markets. Like dropping a pebble in the water, we saw how a market correction in the Shanghai stock exchange can create waves and increased volatility in markets across the world.
During August many of the world’s stock markets were closed the month with their worst declines since the great financial crisis of 2008. However, this correction was unlike that of the past and was triggered primarily by low economic growth expectations in China.
Most of August’s market movements can be attributed to China’s slowing economic growth, monetary policy, and inefficient capital markets. The Shanghai Composite peaked in June and has since fallen 38%. In last week’s market update, we saw how a fall in the Chinese stock market rippled across the world. As the month came to an end worldwide indices were down:
It is important to remember that China is undergoing a structural shift from an export-based economy to a consumption-based economy and that their capital markets are still in their infancy. Chinese policy makers do not have the same history and experience of navigating shifting economic conditions to draw on as those in more developed economies. What we’ve seen this month can be viewed as the growing pains of that economic shift, and a learning curve for policy makers.
The sudden decline of equity markets may trigger bad memories of the 2008 financial crisis, but there are some important differences between what happened then and what is happening now. The U.S. remains the world’s largest consumer and it is showing signs of growth: unemployment remains relatively low, consumer confidence is growing, and the US Federal Reserve is considering increasing interest rates (a positive sign). Oil prices are low mainly due to oversupply and not lack of demand.
At home, we are experiencing contraction due to the decline in oil prices. We have also seen the Bank of Canada reduce interest rates and the Canadian Dollar fall against the U.S. Dollar. As we rely on exports such as oil, a high U.S. Dollar is beneficial to our economy. Unfortunately, the low price of crude has slowed down many operations, halted new projects and ultimately lead to layoffs in the energy sector. As campaigning for the Canadian federal election is underway, the future and strength of our economy is the main focus of all parties.
Due to the increased volatility and broad market declines all our portfolios ended the month down. It is important for investors to remember that periods of high volatility and significant market declines like this will occur from time to time. These are the times when it is most important to maintain a disciplined and diversified investment strategy, to hold steady throughout the market cycle, and avoid panic. Investors who react to negative market events by selling their investments out of fear and panic tend to participate in most of the losses while missing out on the future gains. Investing with a low-cost discretionary portfolio manager like WealthBar can help keep emotional aspects out of the picture by allowing a professional to maintain a consistent and diversified portfolio for you. Short-term market adjustments are to be expected and maintaining focus on the long-term is an important part of a good wealth management strategy.
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