Although the second quarter of 2015 was largely a cool, calm, and collected affair, it closed with a crescendo: Greece defaulted on its $1.7 billion payment to the International Monetary Fund (IMF), the Chinese stock market dropped precipitously, global volatility spiked, and, as I write this, a technical glitch has prompted a suspension of trading on the New York Stock Exchange (NYSE).
The return of volatility, pessimism, and fear should be viewed as a necessary retrenchment and opportunity. Several factors have coalesced to create the current dynamic in sentiment, namely:
- Greek Default
- Chinese Market Volatility
- Trepidation regarding the “soft patch” of US economic data and looming interest rate hikes
- Lingering skepticism about the global recovery.
While Greece’s game of chicken with the IMF and the Eurozone may make for high drama, (and with due respect to the Greek people) Greece is irrelevant but for the broader principles at stake. Greece is less than 2 percent of European GDP and its specious debt is now largely held by the IMF and the European Central Bank (ECB). As such, it poses no serious threat of contagion to the European banking system, Europe’s economy, or global financial markets.
China continues to struggle with the task of rebalancing its economy away from infrastructure and capacity toward consumption, as well as away from savings and towards investing. Although the pace of China’s market declines has been impressive, some context is useful. For instance, having gained 152% from June 2014 thru June 2015, the Shanghai Composite Index has now lost about 30% of its value. The rampant speculation and indiscriminate trading that drove the run up will certainly end badly, but it doesn’t pose a longer-term threat to the viability of nascent Chinese domestic equity markets. Further, China has a massive war chest of cash and a full arsenal of monetary policies still at its disposal – an enviable position relative to more developed economies.
Meanwhile, although US economic data was softer than expected during the 1st Quarter, several key metrics (unemployment, wage growth, etc.) have reached key levels indicative of a self-sustaining economy. S&P 500 operating earnings should rebound strongly from the first quarter as the drag of a stronger US Dollar on exports and foreign revenues has abated.
Looking ahead to the remainder of 2015, we continue to see opportunities in both domestic and international markets. US equity market are fairly, but not richly, valued. Foreign developed markets, especially in Europe and Japan, display promising metrics in terms of consumer spending, earnings yield, and valuations. While debt overhang will constrain global growth below levels seen in previous expansions, modest (and perhaps more sustainable) growth is far more likely than the alternative – and most global markets (sans China) display few attributes of being overextended.
As always, if you have any questions or would like to discuss you portfolio in greater detail please contact us, we are happy to help. Finally, consistent with prior Second Quarter portfolio commentaries, be sure to check out this year’s Colorado Shakespeare Festival. Celebrating its 57th year, the season features a spectacular lineup including Othello, Henry V, the rarely performed Henry VI Part 1, and Much Ado About Nothing; it runs through August 9th.
Thanks for reading,
-David Wolf, Chief Investment Officer