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Global Growth Concerns

Kaylynn Smith - Thursday, August 27, 2015

I thought you would be interested in the following commentary from Investment Strategist Kate Warne on what's driving the stock market's decline and what to keep in perspective.

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Stocks Slide on 3 Global Growth Concerns

Stocks and bonds have been volatile this year, with many large daily price moves. But last week's bigger stock market decline still may have surprised you. The S&P 500 and the Dow Jones Industrial Average (Dow) both dropped 5.8% over the past week. That put the Dow down about 1,000 points and more than 10% from its all-time high, into correction territory. And last week's decline has continued into this week.

In addition, this pullback has been global. Foreign developed markets have also dropped about 3%. Worse-hit commodities and emerging markets are down more. And, as frequently happens, interest rates declined and bond prices rose as money moved to less-volatile investments.

Global Growth Concerns
Stock prices have been falling due to three main growth concerns:

1. Slower economic growth in China - China's economy grew 7% in the first half of 2015, which was half its pace in 2007. China's severe slowdown has crimped demand for commodities, reducing their prices. So countries that export oil and other commodities have been hit hardest, especially emerging markets. We expect the impacts of slower growth in China to continue to ripple through markets short term, as investors watch for signs of stabilization.

2. First Fed interest rate increases - The Federal Reserve (Fed) has said if the economy continues to improve as expected, it will start to raise short-term interest rates later this year. That should be a positive sign for investors. But low inflation, China's slowdown and other comments in the minutes from the Fed's recent meeting have prompted greater uncertainty about the Fed's next move. We continue to think you should be prepared for interest rates to rise slowly and modestly, whether the Fed moves quickly or delays awhile longer.

3. Lower oil prices - Oil prices fell below $40, their lowest in more than six years. Although the pain from falling oil prices is obvious in lower prices for energy companies, consumers and energy-using companies are benefiting. And that's one reason to expect improving economic growth. Eventually, falling oil prices will prompt rising demand and lower production, rebalancing the market.

These concerns aren't new, but recent indicators brought them to the forefront. As is frequently the case, stock prices reacted sharply. But it's important to realize the U.S. remains one of the faster growing developed economies, and we expect growth to improve slightly to 2.5%-3% over the next year. In addition, global growth should rebound as policymakers work to boost growth in the rest of the world.

Do You Have the Right Portfolio?
The drop in stock prices over the past week clearly signals a return to higher market volatility. But remember that volatility means that stocks move down and up. Historically, stocks have dropped by 5% about three times a year and by 10% or more about once a year. This is the S&P 500's first dip (5%) in 2015, and the Dow's first correction (10%) this year. So if you haven't already prepared your portfolio for more volatile markets, you may need to make some adjustments so that your portfolio has the appropriate mix of stocks and bonds. Since stocks and bonds frequently move in opposite directions, having a proper mix can help steady your portfolio when stocks drop.

Keep in mind that even with the recent declines, U.S. stocks remain not too far from all-time highs. While higher volatility is likely to continue short term, we think stocks will rise over time, supported by improving economic growth and rising earnings. That means pullbacks can be opportunities to add quality investments at lower prices. Even though market volatility can be uncomfortable, remember that it's normal and that your investment strategy is in place to help reach your long-term goals.

I hope this information has been as informative for you as it was for me, I will continue to pass along information that I feel you may benefit from.


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