The financial markets continue to experience significant volatility as they grapple with slowing emerging market economies, interest rate uncertainty and declining commodity prices. China remains at the forefront of Wall Street’s radar screen and has been the primary driver of the stock market’s recent correction over the last few months. Although China’s growth rate has slowed considerably, our research at this time suggests China is not headed toward recession and the developed world and global economy will continue to grow slowly.
Declines in commodity prices and the resultant weakness in emerging markets have preoccupied investors and spilled over into the developed markets of the U.S., Europe and Japan. We are presently in the most seasonally weak period of the average calendar year. On an encouraging note, in 13 of the last 14 corrections, dating back to 1980, the S&P 500 has posted an average rise of 10% in the subsequent three months.
The United States economy is weathering a similar roller-coaster ride to the one it has experienced in recent years; a cold-winter induced slowdown to begin the year, followed by a rebound surge midyear and then a glide through the holidays. Despite the turmoil overseas, a strong dollar and low energy prices, the American economy is expanding moderately. Consumer spending, which represents two-thirds of our overall economy, grew at 3.9% in the recent quarter while residential construction grew at over 9%.
In the last month, we felt it prudent to reduce the stock market holdings in our portfolios and are now invested more conservatively. We do expect the higher levels of volatility to persist, regardless of the cause. The financial markets around the world will remain focused on corporate earnings and the prospect for continued American and Global economic growth as we head toward year end.