Volatility Returns After an Exceptionally Quiet Year

From January 1st through last week, US stocks traded in a very tight range of +1%-+4% gains YTD.

Last week, turmoil in Chinese stocks markets flowed into US markets, taking stocks down 6.1% for the month of August and down 3.0% on the year.  We are taking NO action to rebalance accounts due to last week's pullback.  Our clients' accounts are well positioned to ride out this storm. 

As we wrote in our mid year report "Stocks SHOULD have sold off 5-10% sometime during the first half of the year as the employment situation and corporate earnings failed to impress.  With both poised for improvement in the second half of the year, we now lift our expectations of S&P 500 gains to 6% for 2015."  We had to wait a few extra months to see the correction we expected, but our conclusion about year end gains remains unchanged.

Why China, why now?

In recent years, many observers forecast that China would become the world's largest economy, surpassing the United States by the end of the current decade.  We were skeptical of that forecast:  Too surpass the United States, China would have to successfully manage the transition from an export driven economy to a consumer driven economy. 

China from 1980-present mirrors the United States from 1870-1930.  Mass production was invented by British textile manufacturers, but perfected in the mills and works shops of the US - shoes & clothing, household goods, processed food, and light machinery.  Incredible wealth flowed from production but also enormous divergence in economic equality and increasing mistreatment of average workers.  Agrarian workers suffered as mechanized agriculture replaced family farmers ("The Grapes of Wrath"), and farm prices collapsed.  Bank credit and loans soared, including the introduction of buying stocks on margin.  Housing and stock prices soared.  The increasing imbalances were resolved by the stock market crash of October 1929, which wiped out 90% of stock market capitalization, and plunged the nation into the Great Depression.

Read the entire commentary here.