We are still in the midst of portfolio repositioning, as not necessarily a cause of the market’s volatility, but in response to the markets initial decline triggered by China’s move to float its currency and introduce other measures to support the economy as capital flows out of the country.
This has brought home the realization that commodity prices are likely to stay lower for longer increasing the odds of accidents, credit and otherwise in that sector of the global economy.
As I have said previously, I don’t think the gyrations; particularly those to the downside are forecasting a recession in the US or elsewhere in the developed world. The picture is more mixed for the emerging markets. It reinforces the likelihood of continued QE in Europe and Japan.
It does support our view that the dispersion of winners and losers in various stock markets around the world will increase, and volatility, while coming down from its peaks, will remain relatively high in the US vs. the period of QE. We are moving into a different regime than the period from 2009 to the present. Portfolio allocations should reflect adding managers, active managers, who could take advantage of this volatility and mitigate some elements of risk. Look at who is doing well this year vs. earlier periods. You may be surprised.
There are suggestions that the volatility itself pushes out the likelihood of a Fed Funds increase Thursday. I am not sure. I think we remain data dependent and the most important data is within the US – GDP growth and more importantly employment and wage data. We expect the numbers and revisions to continue to be positive. Whether the Fed increases the target in September or later, may be less relevant to the economy and more relevant to volatility and dispersion, which we think occurs whether the target increase is September, October or later.
Let’s keep in mind that the rest of the developed and part of the developing world is continuing variants of QE. This dispersion will continue until other economies see wage growth and capacity concerns.
Let’s take advantage of the dispersions. This a time when more portfolio guidance becomes critical. Pay Attention.