Investors should remember that these periods of extreme volatility, while painful, are infrequent and that focusing on the economic fundamentals will aid in generating returns, particularly when valuations readjust.
The shock to global equities was made in China and not born in the USA. In fact, amidst the height of the volatility in August the economic data out of the US was pretty decent.
There was the stronger than expected revision to second quarter economic growth to 3.7 per cent on an annualised basis and a sharp jump in consumer sentiment.
According to The Conference Board consumer confidence surged in August by the second-largest amount since the financial crisis.
When the financial markets are fixated on a possible collapse of the Chinese economy, and the People’s Bank of China’s ability to control it, it matters how the shoppers in the world’s largest economy are feeling.
Why is this? Because they account for 68 per cent of US economic output.
Of course the more cynical market watchers would point out that this survey wasn’t conducted during the recent period of market turmoil and it may be that other subsequent consumer sentiment surveys do show a bit of a dip.
Regardless, all these surveys are trending in the same direction – upwards.
The willingness to spend in the good ol’ US of A can be attributed to three main factors: a labour market that is improving, rising home prices and lower fuel prices at the pump.
The unemployment rate has fallen by 2.2 per cent in the past two years and is on its way towards 5.0 per cent by the end of year.
While wages haven’t grown in line with this decline, the pressure on employers to pay their workers more will increase as the labour market continues to tighten.
Consumers also feel a boost when home prices are on the rise. The housing market has lagged the rest of the economic pick up but that looks to be changing.
Equally, a gallon of fuel has fallen significantly from US$3.80 in May 2014 to US$2.73 by late August, so Americans have a few more dollars in their wallet each time they fill up at the pumps to spend elsewhere.
These savings are meaningful in a country with a higher per-person petrol usage than anywhere else in the world — on average people in the US use more than a gallon of fuel a day.
So with a mounting sense of employment security, the added reassurance of property wealth, and a few extra bucks in their pocket after each fill-up, what’s a consumer to do? Hopefully they will start spending.
The recent international events will weigh on September’s meeting of the US Federal Reserve and the probability of that much anticipated first rate hike has faded, but not disappeared, as members of the US rate-setting committee have voiced their concerns.
Even still a rate hike this year is very likely and this will impact that all-important US consumer in perhaps a positive manner. The income effect of higher rates could outweigh the wealth and substitution impact of higher interest rates.
This is because American households hold more interest-bearing assets liabilities and it’s estimated that the added income from a raise in the official policy rate could add as much as US$20 million to US households in the first half of next year.
Not all of it will be spent, but it’s not an insignificant amount of money.
Markets have had a wild ride for the last few weeks, one that was driven by sentiment rather than reflecting the economic reality of the capital market of many of the countries affected.
By regaining that focus on the economic fundamentals and the improving growth in the developed world, investors will see the opportunity in risk assets.
However, gains will be harder to come by and there will be more volatility on the way.
Kerry Craig is a global market strategist at JP Morgan Asset Management.
