Aug 31, 2015 | Post by: Roman Chuyan, CFA Comments Off on Short-Term Rhyme

Short-Term Rhyme

“No occurrence is sole and solitary, but is merely a repetition of a thing which has happened before, and perhaps often.” 

– Mark Twain, The Jumping Frog

Investors were shaken by a global equity plunge in the past two weeks. Emerging markets were already falling this year, due to plunging commodity prices and concerns about the upcoming Fed interest rate liftoff. On top of all this, China shocked markets on Aug. 11 by devaluing the yuan, which would make exports by other Asian economies less competitive, and might hurt China’s imports from the U.S.

The 12% correction we just experienced in the S&P 500 demonstrated that U.S. markets are also susceptible to global worries. The correction culminated in a two-day drop of 5.2% last Monday and Tuesday, on high volume – a typical sign of a near-term bottom. Equity markets then rebounded sharply, reversing the weekly drop and cutting the loss in the S&P to about 7% from peak. U.S. WTI crude oil contract touched a low of $38 before recovering to $45.

U.S. economic fundamentals remain sound. Q2 U.S. GDP was reported on Thursday to grow at 3.7% – up from an initial estimate of 2.3% and above all forecasts by economists. Initial jobless claims, near the lowest in 15 years, show continued labor market strength. Accordingly, our mid-term (6-month) model’s outlook for U.S. Equities continues to be positive. 

After the Asian financial crisis hit in 1997-98, former Fed chairman Alan Greenspan warned that the U.S. could not remain an oasis of prosperity in a world beset by financial turbulence. Today, there are both parallels to, and differences from that period. Major commodity-exporting countries such as Brazil and Russia, are suffering due to the recent rout in commodity prices – their economies are in recessions already, and their currencies have dropped (although far less than the ruble devaluation in 1998). Russia in 1998, led by then-president Yeltsin, was suffering from longstanding economic, social, and political woes; we could argue that today’s Brazil is also heading that way.

History provides context to better understand the current situation, as global trends look very similar. As Mark Twain is reputed to have said, “History doesn’t repeat itself but it rhymes.” Given the global context, we need to pay as close attention to short-term risks as to mid-term outlook.

Please contact us to learn about historical analysis that we are following, and the action we are taking to protect portfolios.

Model Capital Management LLC is a tactical investment manager. Please review the following pages for more information on Model Capital’s approach to tactical investment management and our tactical management strategies.

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