Global financial markets finished lower today and capped off their worst week of 2015 amid concerns that the global economy may begin to slow down. Most of the recent uncertainty can be attributed to China. They devalued their currency last week which has caused a rippling effect across global currency markets. China also released its weakest manufacturing data since the global financial crisis in 2008.

It is clear that China is experiencing come growing pains and many of which may persist for a few quarters. However, we do not believe their economic woes will continue to linger over the overall global markets in the long term. The Chinese government has also showed that they are willing to do whatever is necessary to stimulate growth in the world’s second largest economy. Overall, we believe that China’s long term growth story is intact, but we do expect increased volatility as they work through some of their domestic issues.

The recent market pullback has pushed the S&P 500 down over 6% from its all-time high that was set in May of this year. If this rout continues it may classify as a correction (as defined by a 10% drop from the high). Although corrections in financial markets are sometimes hard to stomach for investors, they are a necessary/healthy event for financial markets and help shake out the speculators. In many instances corrections present attractive buying opportunities.

To put the current market pull back in perspective we did some research and found that the last U.S. market correction occurred in June 2012. Since then the market is up 58%. The S&P 500 has not fallen more than 5% off its highs since October 2014, which was the longest streak in 11 years (we broke this streak today). This data is important because as long term investors we have to be aware of the fact that financial markets do not always go straight up and that many times it is actually quite a bumpy ride.

A market correction, bear markets, and recessions are all taboo words to investors, but it is important that we understand the differences. A correction is defined as a reverse movement in price of at least 10%. Corrections generally have a shorter duration than a recession or bear market. In a bear market, prices fall and widespread pessimism causes the negative sentiment to be self-sustaining. Although exact figures vary, for many, a downturn of 20% constitutes a bear market. A recession is defined as a period of temporary economic decline whereas Gross Domestic Product (GDP) falls for two consecutive quarters.

Typically bear markets can be tied to an economic or monetary policy catalyst. Based on the underlying macroeconomic fundamentals we do not believe we are set-up to enter a bear market. The underlying growth story for the U.S. economy appears to be intact and we believe that we can actually outperform most estimates. Below is a chart that highlights some of the GDP estimates from well know investment firms.

2015 Q1 2015 Q2 2015 Q3 (Est.) 2015 Q4 (Est.) 2015 Annual (Est.)
Bureau of Economic Analysis 0.6% 2.3%
JP Morgan 2.0% 2.5% 2.2%
Goldman 2.3% 2.3% 2.3%
Reuters 2.7% 2.8% 2.2%
WSJ 2.74% 2.84% 2.16%
Kiplinger 3.0% – 3.5% 3.0% – 3.5% 2.5%
Analyst Average 2.6% 2.74% 2.27%

As you can see from the chart, most analysts are predicting economic growth will pick up in the 2 remaining quarters of 2015. These are not lofty expectations and we believe that the U.S. economy has a good chance of outperforming these numbers.

We have worked hard with our clients to make sure that they understand that market volatility is a natural part of long term investing and we have also designed their portfolios to make sure that the chances are high that they can continue to maintain their current lifestyle through all market environments if they stay disciplined.

This publication is provided as a service to our clients and associates of PFA solely for their own use and information. The material is derived from sources believed to be reliable but its accuracy and the opinions based thereon are not guaranteed and have not been verified. The content in this publication is for general information only and not intended to serve as individual investment advice. You should seek independent advice from a professional based on your individual circumstances.