“What, if anything, can the rest of the world do to mitigate the volatile China impact?” – Anonymous client
Great question…and unfortunately, I don’t know the answer. Free trade is a basic American principle than underpins our capitalist system (my editor removed “mostly capitalist”). Of course, we all know that free trade isn’t truly “free” and America still operates from an unfair position with China. This is not new in 2015 but what’s changed over time is how quickly information is disseminated to “investors,” (human or not) and the speed at which our intermediaries can transfer funds.
Watching China move from a manufacturing to a service economy is like watching an awkward teen move into adulthood. You can’t hasten the pace, or make them mature overnight, since some things just take time. China implemented market circuit breakers on the first day of trading in 2016 that were tested that same day. Trading was suspended for 15 minutes when the market (CSI300 Index) dropped 5% and halted the rest of the day after the market dropped 7%. The circuit breaker was deactivated later that week after halting trading twice and exacerbating the market sell-offs it was designed to limit.
Back at home, the U.S. economic numbers generally look sound but there’s nothing to get excited about. We are missing that one glaring opportunity to spur inflation and, in turn, wage growth. Long-term GDP growth of 1.5% is a yawner, labor force participation is down to 62.5%, and we know the graduating class of 2015 is the most indebted class ever. In other words, they’ve already consumed a larger part of their future income than previous graduates. Talk about a drag…on the economy.
It is ironic but a drop in the value of the U.S. dollar, an increase in interest rates, and a drop in the supply of oil actually sounds good right now (see “Oil Markets”). It makes me long for the days of 13% interest rates and long lines at the gas pump when you could only fill up on odd or even days (depending on the last number on your license plate).
But then again…stagflation is depressing. I’d take today’s economy over the 1970’s any day. Economists disagree on whether there will be three or four Federal Reserve rate hikes in 2016 (see “The Fed and Interest Rates”) and in spite of a 0% return in money markets, we have almost $12 Trillion in cash (notice the capital “T,” see “Cash Accounts”).
As usual, we recommend a balanced portfolio with a risk profile suitable for each investor’s tolerance and goals. 2015 seemed to play out the new normal of volatility, but we should continue to invest wisely, steadily and with discipline. Volatility is here to stay.