Papale’s Take on Recent Volatility

By Steve Papale

Kids are back in school.  Yesterday was the first day in our district.  In my house it’s always an adventure these first couple days.  After getting up at 11 for 3 months my boys of course struggle to force themselves to climb out of bed at 6:30.  If left up to me this could have been avoided.  My idea was simple.  2 weeks before school I was going to wake them up every school day at 5 am.  Since they hate getting up early they would have thought fondly about sleeping in until 6:30 am when school started.  They would have been looking forward to the start of school.  But my idea got shot down.  So just like years past, the same grumbling and dragging at 6:30.  Some family traditions go on.

In case you have been on an intergalactic trip or living off the grid for the last week or so, markets have been a bit whippy.  Monday saw markets open down more than 1000 points on the Dow before closing down around 600.  Last Friday was ugly too with the Dow down more than 500.  This Wednesday saw markets rebound to the tune of more than 600 in the Dow.  Hard to pin down exactly what sets off markets to such big moves.

In August many market players are on vacation so there is traditionally less liquidity so any moves tend to get exaggerated.  Some say people getting nervous about the Fed raising rates at the next meeting.   Of course China, after rallying hard the first half of the year has sunk hard since the beginning of the summer.  There seems to be indications that China’s economy may be slowing.  And to that point, over the last couple weeks China has moved to devalue their currency, the Yuan.

This, in theory, serves as a stimulus to China in that a weaker Yuan relative to the dollar mean goods made in China get cheaper for Americans paying in dollars.  This will increase exports from China hence leading to higher demand for China made products.  If the Chinese economy really is slowing, companies that do business in China will of course feel the pinch.  Stocks like Apple and General Motors both got hit hard this past week as they both do a significant business in China.  While a weak Yuan/strong dollar relationship may help China and boost exports, it could do the opposite for the US.  As exports are cheaper consumers purchase more foreign products and less US, potentially causing a slowdown in higher priced US goods.

How this ultimately plays out remains to be seen but heading into September this year may bring just a bit more nervousness for the markets.

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