As many of you know, equity markets have been recently weak and volatile.
Recent market developments such as Greece and Puerto Rico, the decline in commodity prices and the China slowdown have unnerved investors.
Of all these, I believe the China developments are the primary driver of market difficulties.
Earnings
On the earnings front, revenue growth is soft and profit results are mixed versus the modest expectations by Wall Street analysts.
The July US labor market report was positive but lackluster.
Commodity prices, including oil, stem from economic weakness in China, including a steep decline in exports.
China Surprise
China surprised the financial markets on August 11 with a surprise devaluation of its currency, the yuan.
The move resulted in a roughly 3% decline, the steepest move in two decades, as of August 13.
A lower currency for China makes their products more price-competitive in global markets.
It is worth noting that China is not stranger to currency manipulation.
Central Planners
Over the past year and because many other countries have been devaluing their currencies, China has seen its currency, among certain countries, appreciate 3% this year and 15% over the past 12 months.
Add this to investment trading restrictions and rate cuts and high levels of margin debt, there is an indication of great concern emanating from China’s central planners.
The nature of such indicators suggest they are problems that will take some time to work out.
The Fed
For US markets, there are concerns about companies with exposure to China.
A strengthening dollar is also making a negative mark on multinational company earnings.
Lastly, the Fed has been giving strong indication for an initial rate increase in September.
Such a move will likely give the dollar a further boost and dampen export prospects for domestic companies.
In other words, a modest rate increase by the Fed won’t just mean higher borrowing costs. There are also currency implications that will affect trade.
Outlook
I believe current conditions present a mixed picture for investors right now.
Domestic markets are not overly expensive and they are trading near average historic valuations with some pockets of euphoria.
Earnings growth looks to be in the modest single digit area.
Long View
The best news is that sentiment is looking pretty negative right now with media being very focused on the bad news.
With oil falling, we will probably see some relief at the pump after the summer driving season passes.
Given negative sentiment and modest but favorable domestic conditions, I remain in favor of a long-term approach to investing.
Photo Credit: tdlucas5000 via Flickr Creative Commons
