When China Steps, the World Shakes

In November, Joe Downes (Wealth Manager), Saul Baumann (Associate Wealth Manager) and I went to more than a week of presentations on investment and financial topics. A key topic was the Chinese economy, and it was addressed by various economists, many with a strong global background. Most felt that the Chinese authorities know what their challenges are and are seeking to address them. Further, most felt that the Chinese economic growth of 6% to 7% per year (a pretty good clip) will likely continue.

China’s activity is influencing the world’s economy because it is now the second largest economy in the world (the U.S. continues to boast the largest economy). When I was an exchange student in Mexico thirty-five years ago, I had the pleasure of getting to know students from Germany, El Salvador, Bolivia, and, of course, Mexico. I studied economics with some of these students, and had many discussions in and outside the classroom. I remember thinking, “The U.S. is an economic giant. When it takes a step, the world shakes.” It strikes me that, now, when China takes a step, the world shakes, including the U.S. to a modest extent.

I thought you might value reading Michael Hasenstab’s (Ph.D., EVP and Portfolio Manager for Franklin Templeton Investments) comments, in the link below. He is a highly reputable international expert. The introduction to Michael’s article reads as follows: “The first few days of 2016 have seen a return to the type of volatility global markets experienced in the third quarter of 2015, and the root cause seems to be the same: concern over the sustainability and trajectory of Chinese economic growth. Our Templeton Global Macro team believes many of these fears may be overblown, and feels that, while volatility may continue in the short term, the underlying story for China is more positive. Here, Templeton Global Macro CIO Michael Hasenstab explains how he sees a moderation of Chinese growth as a normalization rather than a slowdown, and why he doesn’t anticipate a currency war.” 

If we take a quick look at the U.S. stock market, the Dow Jones Industrial Average (Dow), a price weighted average of 30 significant US stocks, has rebounded slightly from its low for the year, 15,766 on Jan 20, 2016, to close at 16,205 today. This is approximately -7% down from the start of the year and about -11% down from the all-time highs in the spring of 2015. We continue to believe that we are experiencing an investment correction vs. the start of a more serious bear market, but are keeping a close eye on global growth considerations and opportunities to buy. The risk management built into your portfolio (different for each investor) does not generally prevent declines, but does tend to offer downside protection, an important factor right now.

Please let us know any and all questions. We appreciate hearing from you.

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Dow Jones Industrial Average Total Return:
The Dow Jones Industrial Average Total Return is a composite of 30 stocks spread among a wide variety of industries, such as financial services, industrials, consumer services, technology, health care, oil & gas, consumer goods, telecommunications, and basic materials. The index represents approximately 23.8% of the U.S. market, and is price weighted (component weightings are affected by changes in the stocks’ prices). Maintained by the Averages Committee, components are added and deleted on an as-needed basis.