When China announced a devaluation of the Yuan, it was indicative of a sickness that has been festering in the global equity markets. Growth has been anemic for several years, but equities have generally rallied. The primary contributor has been the generally low level of interest rates around the globe. Today, the Federal Funds rate sits at 0%, with the prospect of a 25 basis point increase before year end. This, coupled with uncertainty in China, is in our view the catalyst of the current market volatility.
Cutler has been advocating that a 10% market correction could be “just around the corner” for several years. This is a normal occurrence for equity markets, but one that hasn’t happened since 2011- over four years ago. Last October, stocks had just over a 9% correction. The culprit at the time? The end of quantitative easing. The end of QE III is a similar factor (monetary tightening) as the onset of 0.25% interest rates. The market will adjust, as it is currently, and ultimately the economy will move forward under these very accommodative policies. The Fed continues to be a stimulus; even with modestly higher rates, we are in a historically low rate environment.
What should investors do? As we advocated last year, ensure that you are in a diversified portfolio. At any given time, certain asset classes may underperform and look unattractive. However, when investments shift leadership, this change can take place very quickly. Timing the market is not a sustainable approach to investing, but understanding your portfolio risk will help you remain invested during times of turmoil. Give Cutler a call if you would like to talk about your portfolio risk at any time.