Special Edition: What’s Going On in The World?

With all the volatility markets have experienced in recent weeks, we wanted to discuss a few of the economic events that have occurred around the world, and offer our perspective on what recent events might mean for you as an investor.

The Debt Crisis in Greece Was Resolved…or Was It?

You might have heard that nearly bankrupt Greece was in talks with its troika of European creditors over a new financial bailout. The debt showdown in Greece occupied a lot of headlines in July as the country edged closer to a financial meltdown. Government officials closed banks and imposed withdrawal limits to keep Greeks from draining their accounts ahead of a possible exit from the Eurozone. In mid-July, Greek and European negotiators were finally able to hammer out a compromise that prevents a Greek bankruptcy (and Eurozone exit) while instituting some of the reforms creditors wanted to see.[1]

However, the wheels may be coming off the bailout deal already, as both sides ultimately want very different things. Greeks want austerity relief and debt restructuring while creditors want further economic reforms.[2] Will the deal lead to a final resolution on Greece’s issues? We’re not so sure.

China’s Bear Market Hits a Nerve

China’s Shanghai Composite Index plummeted by over 20% in June and July, putting the country’s stock market in its 10th bear market of the last 25 years. While many headlines spread concern that the rout could spread to U.S. markets, these fears are probably overblown. In contrast to the highly volatile Chinese stock market, the S&P 500 has experienced just two bear markets in the last 25 years, and Chinese pullbacks haven’t historically coincided with bear markets in the U.S.[3] All that being said, the past can’t predict the future and we’re keeping a close eye on what’s happening in Asia and around the world. While we do see some headwinds and potential threats on the horizon, we still believe in a globally diversified portfolio strategy.

Corporate Earnings Are Just So-So

Second quarter earnings season came into focus in July and the picture so far is pretty mediocre. As of July 31, with 354 S&P 500 companies reporting, earnings were down 2.5% on 4.4% lower revenues as compared to last year. The Energy sector is dragging on overall earnings growth because of the effect of low oil prices. Taking Energy companies out, analysts expect overall S&P 500 earnings to be up 5.4% year-over-year on 1.4% higher revenues.[4]

The results tell us that a lot of the revenue weakness companies experienced in the first quarter stayed with them in the second. Will U.S. firms be able to shake off the doldrums in the second half of the year? It’s hard to say. With the European and Chinese economies still struggling with growth, the global demand picture doesn’t look too strong.

Domestic Fundamentals Are Mostly Solid

Domestically, the economic picture is doing reasonably well. Hiring is increasing steadily, and wage growth is edging upward, but consumer sentiment dropped in July, probably because of concerns about Greece and China.[5] We also got our first look at second quarter Gross Domestic Product (GDP), which showed that the economy grew 2.3% last quarter. While economists had predicted stronger economic growth, it’s still a vast improvement on the tepid 0.6% growth achieved in the first quarter.[6]

The Federal Reserve met again in July, and though no interest rate changes were announced, the central bank reiterated its intentions to raise rates this year. While the Fed seems more confident in the labor market, future rate decisions will still be contingent on further job gains.[7] Are interest rate expectations already baked into stocks and bonds? We don’t know for certain, but the Fed has been telegraphing its rates play for months now, so we hope that markets won’t overreact when rates finally start to go up.

How We Can Help

Today’s volatile markets can make for stressful investing. While we can’t predict or control market movements, we can help you create personalized investment strategies that are designed to help you pursue your goals regardless of what markets do. If you have questions about how current events affect your portfolio strategies, please contact our office at 561-353-3700.

Warmest Regards,
Jonathan