Recapping the August Correction

Between May 21st and August 25th, US stocks as defined by the S&P 500 slid by 12.4%, leaving the index down 5.4% on the year and down 2.3% over the last year..  A correction is defined as a slide of 10% or more, while a bear market is a decline of 20% or more.  The S&P500 is currently down 10.0% from the May 21st record.   The Chinese stock market is off 38.8% from its June 12th high, down 0.9% on the year and still up 38.1% over the last year.  US stocks are on the low side of fair value.  Chinese stocks could fall another 50%, yet still be overvalued.

We were pleased that a number of our clients added cash to the accounts in the last two weeks.  We happily invested those additional funds in stocks, though it will be a few months before US stock market resumes its upward trajectory.  When the stock market has a "heart attack" as we saw in the last three weeks, it takes time before the market "gets back to the gym."  Investors remain skittish and race to sell any rally.  Earlier in the year January through June, retail investors purchased $83 billion in equity mutual funds as the S&P made multiple record highs.  In July and August, investors sold $56 billion - a classic example of buying high and selling low.  We still believe our year-end forecast of 6% gains of 2015 in the S&P 500 is reasonable, which would be 13.5% higher than Friday's close.

We addressed concerns about China in our August 22nd commentary.  The main thing we're tracking now is "how will the Chinese government switch from a 'command and control' economy to an economy flexible enough to provide for China's 1.36 billion in population?"  Governments are commonly at greatest risk from the frustration of "rising expectations."  China is the second largest economy after the US, but 89th in per capital income (out of 187 nations - US is 15th.)  We won't know the answer to that question for years.

Read the entire commentary here.