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A Confluence of Factors Tip Stocks Into Correction Territory

Sunil Swami, Chief Investment Officer | AUG 25, 2015

Global stocks have fallen in August due to a number of factors, with U.S. markets particularly hard-hit Monday. The Dow plummeted a record 1,089 points at the open, and closed down nearly 600 points. The S&P 500 was down 12 percent from its May 21st high, crossing the 10 percent threshold into correction territory.

What's Driving These Developments?

The principal factors in this month's market volatility have been the steep decline in the Chinese stock market this year along with China’s devaluation of its currency, the yuan.  

Several attempts by the Chinese government and the Bank of China to support the stock market appeared less effective than hoped. This further fueled investor fears about the slowdown in the Chinese economy and its impact on global financial markets. European companies, particularly high-end consumer brands such as BMW, Prada, and Mercedes-Benz, have significant exposure to the Chinese market and were hit hard. The German DAX index was down over 15 percent as of August 24th.  

The continuing fall in oil and other commodity prices to multi-year lows along with investor worries about a potential rate hike in September has not helped matters. In the U.S., market internals have been weak for some time. While the indices were held up by large-company stocks like Amazon and Google, stocks of many companies particularly in the Energy, Materials, and Industrial sectors were in bear markets before this correction began. What was needed was some bad news to tip the market over. China provided that bad news.

Our View

At Alerus, we continue to believe that economic fundamentals, particularly in the U.S., should not deteriorate materially due to developments in China. We also expect global central banks to respond to this correction in stocks. We took the opportunity the market gave us to add to new positions. This month’s volatility is also a reason that Alerus encourages investors to have a diversified portfolio to help weather events like these in helping to achieve their goals.

 

This article is provided for informational purposes only, is not intended as an offer or solicitation for the purchase or sale of any financial instruments and should not be relied upon as an investment recommendation. Alerus Financial, N.A. and its affiliate subsidiary companies make no representations or warranties as to the accuracy, completeness or timeliness of the information. The information is not intended to provide legal or tax advice. Individuals should consult a qualified legal or tax advisor for advice specific to their circumstances.

About the Author

Sunil Swami, Chief Investment Officer

Mr. Swami has decades of experience in the investment management and related fields.

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