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Wednesday, August 26, 2015

Tuesday was ugly, as the markets’ “head fake” – that is, opening strong and then falling into the market close – dismayed investors. So why are consumers so happy? Consumer confidence for August surged to 101.5 astounding forecasters; Case-Shiller home prices rose more than expected at 4.5 percent for the year ending in June; new home sales were robust in July, and this morning’s July Durable Goods handily beat expectations on top of a positive revision to June’s strong reading. U.S. markets opened strong this morning on this positive economic data but China continues to be the “tail that wags the dog” and their market continued its downtrend. Please see trends in Consumer Confidence on page 51, Housing on page 58, and Durable Goods on page 60 of the Voya Global Perspectives™ book.

Tuesday, August 25, 2015

Investors are reeling from the global selloff. No one knows if the worst of the volatility is over. We do know that the U.S. economy has been steadily improving but global growth is weak. We also know that central banks tend to protect their financial markets. Indeed, China’s central bank stepped in yesterday and cut interest rates for the fifth time since November, lowering the one year lending rate 25 basis points to 4.6 percent and decreasing the required reserve ratio for banks by 50 basis points. It is not clear if this move will restore confidence or be viewed as just another in a string of ineffectual attempts to calm markets. But for today Europe is up big and the U.S. markets opened up sharply. Fearful investors who sold late yesterday may be missing the opportunity to recoup some of their losses. The recent market moves underscore the need for investors to have a plan created in calmer times to avoid any rash actions that may be inconsistent with long-term investment goals. Please see the Voya Global Perspectives™ Special Market Update for more guidance on navigating volatile markets.

Monday, August 24, 2015

That market corrections happen is certainly not a surprise, though that statement is likely cold comfort for investors in the midst of one. As with any correction, however, now is the time to persist with the investment plan created in calmer times and avoid any rash actions that may be inconsistent with your long-term investment goals. Here a few things to keep in mind:

    • The S&P 500 is about 10% cheaper than it was one week ago. When the dust settles, bargain hunters may have an opportunity to pick up great companies at a discount. 
    • Fixed income investments — including corporate credit, U.S. Treasuries and GNMA — are providing their intended risk-control function.
    • Investors have been whipsawed by negative market action twice in 2015 — driven by low oil prices and a high U.S. dollar early in the year followed by summertime concerns about Greece —before recovering fairly quickly. Central banks tend to protect their financial markets, as evidenced in June with the European Central Bank’s bold implementation of quantitative easing. China has plenty of firepower — both monetary and fiscal — to solve its growth problem.
    • The U.S. banking system is stronger than it has ever been due to macroprudential policies instituted by the Federal Reserve.
    • China is not in the same predicament as Asian economies were in 1997, when the sudden withdrawal of “hot money” sent markets into a tailspin. China is a relative insular economy protected against such abrupt flows.
    • The U.S. Fed wields tremendous influence and is due to meet September 16–17. Given the recent global tumult, fed funds futures markets have grown less convinced that Fed Chair Yellen will begin to hike rates in September.
    • The U.S. consumer is prospering, with household wealth and retails sales at all-time highs, jobs near full employment and housing showing broad-based strength.

The current problem is rooted in a Chinese growth slowdown that appears to be more severe than its authoritarian leadership recognizes. Beijing’s unexpected devaluation of the yuan a few weeks ago was accompanied by a sharp 8%-plus decrease in exports and a manufacturing PMI contraction to 47.1, sowing fear into markets and leading to contagion in Vietnam and Kazakhstan. News out of China pummeled commodity prices — oil in particular — which subsequently punished the economies and currencies of commodity export-oriented economies like Brazil, South Africa and Australia. Domestically this is being seen in decelerating corporate earnings, flat CPI inflation and a widening trade deficit.

While times like these put investor fortitude to the test, trying to time markets is pure folly (see our many discussions about the “Folly of Gaming Diversification”). Instead of losing patience and selling at what may be near the bottom of a downturn, investors are advised to stick with long-term investment plans created during less-fearful times.

Friday, August 21, 2015

The global market selloff continues today and investors are worried. While there is plenty to be concerned about there is also plenty to be encouraged about as well. Let’s start off with the good news. The U.S. consumer is stronger than ever with record retail sales, a strengthening housing market, an all-time high in consumer wealth of $84.9 trillion, and the best jobs market in 15 years. Europe’s GDP is improving, manufacturing is expanding. In the Emerging Markets, India is expected to grow faster than China and global consumers are benefiting from low oil which is working its way through as a benefit to consumer spending. The bad news emanates from China as their growth takes a hit in declining exports and contracting manufacturing, setting off a knee-jerk reaction by its central bank in its unilateral devaluation, which sent shock waves in the currency markets. This certainly is spreading to the commodities markets and adversely impacting corporate earnings, in particular the energy sector. Markets normally have regular corrections but this market has gone 46 months without a correction so here we are. We have been here before and investors that didn’t “game diversification” and overact have been amply rewarded. Be assured also that the Fed is taking note and has powerful tools and options at its disposal while China, that won’t get an award for its staid response, could still have a Mario Draghi moment and “do whatever it takes”. Please see Voya Global Perspectives™ record consumer wealth on page 52.

Thursday, August 20, 2015

Kazakhstan, Central Asia’s largest crude oil producer, devalues their currency following Vietnam’s adjustment of their currency peg lower. This is certainly due to the shock waves being felt from last week’s multiple China devaluations. In case you don’t know what Kazakhstan is, it is the world’s largest landlocked country, larger than Western Europe, borders Russia and China and was part of the former Soviet Union. It also makes the Fed’s determination to hike rates harder because these Asian currency devaluations are deflationary to the U.S. which lowers the already low prospects of future inflation. Please see China’s Economy on page 43 of the Voya Global Perspectives™ book for insight into its slowing economy.

Wednesday, August 19, 2015

The Consumer Price Index rose 0.1 percent in July and 0.2 percent over the last 12 months giving ammunition to the Federal Reserve doves to delay raising rates. But the Fed is signaling that it wants to start raising rates in September and if you torture the statistics enough you can get the answer you want. For example simply use CPI less food and energy over the past year and, voila! The answer is 1.8 percent, very near the Fed’s 2.0 percent target. The problem with making exceptions like that presumes that it is just normal volatility around a stable average level. This is nonsense. With the energy index falling 14.8 percent over the past year, it is not likely to ever recover and may get worse if rates are hiked giving further strength to the dollar and lower prices to dollar denominated oil. As much attention that low unemployment has been garnering, the real concern of the Fed is the lack of inflation despite their enormous efforts to the contrary. Please see Voya Global Perspectives™ Inflation – CPI, page 64, and the precipitous drop in headline inflation (CPI).

Tuesday, August 18, 2015

U.S. housing starts expanded to the highest level in nearly 8 years to 1.21 million annualized units with positive revisions in June. This is on top of last week’s strong retail sales as well as employment numbers. The strength in these fundamentals bolsters the U.S. dollar which is about the last thing that emerging markets, in particular China, need right now. Overnight, China’s Shenzhen A-shares collapsed by nearly 7 percent; its devaluation is the recognition that China has a serious growth problem. China growth problems are crushing commodities, which adds to the pressure on emerging currencies from Asia to Latin America and alas, even the U.S. energy sector is not immune. Please see Voya Global Perspectives™ latest monthly outlook “Developed Markets Resilient as Emerging Markets Struggle” for a more detailed insight.

Also, yesterday on CNBC's Squawk Box, Karyn Cavanaugh weighed in on the "new normal" in U.S. economy growth. If you missed it, watch the clip here:

Karyn Cavanaugh

Friday, August 14, 2015

Equity markets follow the earnings of the underlying companies. So it is no mystery why equity markets have essentially been flat for the year. First quarter earnings growth was only 1 percent and second quarter is leaning toward -1 percent growth. The energy sector certainly stands out as the leading market headwind with earnings down 55 percent in Q2 from a year ago. Investors are wondering if this is as bad as it gets. An oil supply gut, coupled with slow global growth, continues to exert downward pressure on prices so do not expect a return to $100/barrel oil. On the flip side, the average global cost of oil production is generally $40/barrel and anything lower may throw some suppliers offline. In addition, according to the EIA (U.S. Energy Information Administration) the low oil prices are actually increasing demand in the U.S. which will help support prices. Accordingly, high margin SUV sales are surging, boosting auto maker profits as more Americans find tooling around town in a gas guzzling living room setting more attractive.

Please watch Doug’s latest comments on the market:

Doug Coté
Thursday, August 13, 2015

Retail sales rose a solid 0.6 percent in July to the highest monthly level ever – $446.5 billion. May and June were also revised upward, affirming the strength of the consumer, and if the Fed is looking for a reason to delay raising rates they won’t find it in this report. Sure the latest China devaluations have caused market jitters and cast doubt on a September hike but there will always be an excuse if you look for one. A Fed rate hike will be a vote of confidence for the economy and may actually strengthen the economy by getting “wait and see” consumers, investors, and businesses off the bench. The level and pace of the Fed’s hikes will likely be gradual and slower than previous tightening cycles so don’t bail on bonds – they are there when you need them in volatile markets. Please follow retail sales on page 13 of the Voya Global Perspectives™ book.

Wednesday, August 12, 2015

China apparently believes if one devaluation is good then two might be better. China is mistaken. Markets like stability, transparency and predictability making China zero for three in its continued unilateral devaluation. Does this signal an impending Asian currency war? Does it signal a deflation tidal wave headed for Developed Markets? When Europe was on the verge of deflation the ECB – its independent central bank – had to review its plan with the European Commission and others which took longer, but ended up being market friendly. China’s central bank (PboC) is not independent and acts with impunity – and, arguably, recklessly – in its decisions. This has the opposite of the intended effect, thus disrupting markets. It is hard to tell where this ends but is raising concerns that China is in a “hard landing” for its economy and markets. Please read more in the Voya Global Perspectives™ latest monthly outlook, titled “Developed Markets Resilient as Emerging Markets Struggle”.


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