Commentary 8/25/2015

On Monday morning we came into the office to the news that the Chinese stock market was down 8%, impressive following an 11% decline in the preceding week.  The perceived catalyst at the moment is the possibility of a sharp slowdown in growth in China and the decision by the China’s central bank to peg the Yuan (the Chinese currency) a bit lower compared to the dollar.    In fact, while the Chinese move may be the trigger, there has been other evidence over the last several months that the global economy was slowing—a long decline in energy and other commodity prices the most evident.  While this represents the global backdrop, US economic indicators have been relatively strong, and our stock market has followed suit.

While in the long run stock markets are a measure of economic productivity, in the shorter term they are driven by investor feelings about the potential for risk and reward.  These feelings can change overnight, and often do.  At the moment it is easy to say that investors are finding stocks to be suddenly a much more risky proposition, but that doesn’t say anything about what next week will bring, when the focus might shift back to low unemployment and growing corporate earnings in the US, or to the tailwind the Fed may create by delaying the decision to raise interest rates and the weakening effect this is having on the dollar. 

As you have heard us say, a fundamental principle of our investment philosophy is to base our portfolios on long-term averages, and not on the expectations of what the next few months will bring.  We prepare for the entire range of possibilities in the investment markets, constructing diversified portfolios in which there are always assets not participating in the latest stock market movement, whether up or down.