08 Jul 2015
By Stuart George, Head of Equity Trading, Delaware Investments
The U.S. equity markets since the start of the year have been experiencing a time correction (a sideways move in price over an extended period of time) accompanied by high levels of volatility. The economic drama coming out of Greece for the last five years seems to have culminated on Sunday when the Greek people voted “oxi” or “no” to further austerity and adding to the market volatility.
The initial reaction in the U.S. market to the Greek saga, however, has been less negative than many investors had expected. While there still is a potential for Greece to leave the euro zone if a deal is not reached soon, many investors have instead chosen to focus on the underlying strength and improving fundamentals in the U.S. economy. These include improving jobs and housing markets as well as expectations for higher corporate earnings in the second half of the year.
Adding to the Greek worries, the investing community has had to deal with volatility introduced by the recent 30%-plus correction in the Chinese stock market. This correction has its roots in an overly speculative run-up that began in late 2014 as the Chinese government opened its market to retail investors. China certainly has structural issues that need to be worked out, but the “speculation-bubble-correction” pattern is one that has repeated itself in China over the years and that many investors have now become accustomed to. In an effort to support the market, the Chinese government has already initiated its own form of quantitative easing and suspended new initial public offerings.
Given all of these macro-level issues, we believe the U.S. market currently remains the “best house on the block.” Accordingly, we believe U.S. stocks are likely to continue their relative outperformance despite the fact that investors will have to work through some heavy volatility in the meantime. Beyond Greece and China, investors are also trying to handicap when the Federal Reserve will begin raising interest rates. Current expectations in the market are that the Fed will begin raising rates in September, as long as the economic data remain robust enough to warrant doing so. If the economic data weaken, the Fed will likely wait until December. (In either scenario, however, we do not believe that a rate hike should be altogether bad for the equity markets.)
The views expressed represent the Manager's assessment of the market environment as of July 2015, and should not be considered a recommendation to buy, hold, or sell any security, and should not be relied on as research or investment advice. Views are subject to change without notice and may not reflect the Manager's views.
Investing involves risk, including the possible loss of principal.
Past performance does not guarantee future results.
International investments entail risks not ordinarily associated with U.S. investments including fluctuation in currency values, differences in accounting principles, or economic or political instability in other nations. Investing in emerging markets can be riskier than investing in established foreign markets due to increased volatility and lower trading volume.