The US economic story hasn’t changed in a year — and that’s great news (DIA …

31 Aug 2015 | Author: | No comments yet »

By this measure, stocks have weathered the worst.

“I think we saw the bottom with roughly 1,900 S&P 500 support, given the way in which Fed policy support has been both the limit and backstop of stocks for years, and China has not been devaluing since midweek,” said Barry Bannister, chief equity strategist at Stifel U.S.After a quiet end to a frenetic week on Wall Street—in which the Dow fell as much as 1,000 points only to rebound by about as many—the question on everyone’s mind is the same… Will the market get off to a another frenzied start like it did on Aug. 24, when news about China’s market crash and economic woes sent the Dow plunging?The decline in the market reflects a change in what financial markets believed the course of the “economy” would have been prior to events over the past couple of weeks. Equity Research. “By comparing the weekly S&P 500 price to the Fed’s weekly asset holdings, we see a tight plus or minus 2 standard deviations range, which points to 1,900 downside and 2,200 upside for the S&P 500 so long as Fed assets remain flat at around $4.50 trillion.” “I think investors would be wise to prepare for more volatility.

For example, more uncertainty about China’s economy, currency devaluations, and whether the prices of commodities like oil will stabilize or fall further. Volatility tends to be cyclical and it definitely appears to be ramping up after a really benign period over the last couple of years,” said Jim Sinegal, an analyst at Morningstar.

The CBOE Volatility Index VIX, -0.19% also known as the fear gauge, spiked to a nearly four-year high last week as the stock market recoiled from uncertainties in China. “The current market selloff and spike in volatility is largely attributed to developments in China and uncertainty about the impact of expected Fed hikes,” analyst Marko Kolanovic at J.P. The Fed is watching developments in the China closely to gauge its potential effect on the U.S. economy, Stanley Fischer, the No. 2 official at the U.S. central bank, said on Saturday.

When New York Fed president William Dudley on Wednesday said the case for raising interest rates in September was “less compelling” in light of the recent market shocks, Wall Street soared. If the economy hits this mark, it should put a rest to recession talk and fears over a rate hike, says Kate Warne, investment strategist for Edward Jones. After all, we’ve seen “job creation at more than 200,000 a month for a while,” Warne says. “That’s not an economy that could be snuffed out by a mere quarter-point rise in short-term interest rates.” Few economists envision a recession in the U.S. and rather believe that developments such as lower oil prices and rising home values will actually help U.S. businesses and consumers. In tech, I’ve anticipated a correction to the “frothy” valuations for a while now, but compared to the last bubble, startups tend to have more fundamentals supporting their valuations.

The recent decline is the result of operating in a global economy and primarily a reaction to the slowdown in China. 2016 is an election year and is not likely to produce a recession. This correction is driven by investor sentiment and concern with the news coming out of China combined with the discussion of a rate increase from the Fed.

The sell-off in the equity markets reflects investors’ concerns that the recent devaluation of China’s currency and the possibility of a currency war with competing countries will add to market volatility and risk. While emerging market economies are showing signs of faltering and much of Europe struggles to address its economic malaise, U.S. employment growth, strong home sales and relatively robust corporate earnings suggest to me that our economy will continue to grow.

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