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Our Perspective on Recent Volatility

August 25, 2015 | Market Commentary

- See more at: https://www.manning-napier.com/Corporate/Insights/Blogs/MarketsEconomy/Article/tabid/313/Article/346/Our-Perspective-on-Recent-Volatility.aspx#sthash.nvFStf5Y.dpuf

Last Thursday and Friday, domestic equity markets saw the sharpest two-day decline since 2011, with the S&P 500 Index, Dow Jones Industrials Index and Nasdaq Composite falling 5-6% over two days. It was a similar start to this week, with broad U.S. stock indexes down approximately another 3% yesterday, though pulling back from greater losses seen earlier in the day. U.S. equity markets are now roughly 10% below their July 2015 highs, and negative year-to-date.

Similar to most of the volatility we have seen during the current bull market, this recent episode has been driven by macro factors, namely the weakening growth picture in China, which has created additional uncertainty surrounding U.S. Federal Reserve moves through the end of this year. Specifically, many investors have been anticipating the first hike in the Federal Funds rate later this year, perhaps even as early as September, given the solid growth footing exhibited by the U.S. economy of late. China’s economic woes and the potential contagion across other markets calls into greater question global growth and, subsequently, the timing of the Fed’s first move with respect to rate hikes. This has created great uncertainty in the markets, leading to a broad sell-off.

We have been expecting growth to slow in China as the country transitions from an industrial-driven economy to one that is consumer driven. Economic readings from the country have come in softer than expected, particularly on the industrial side, and this has led to yet another global growth scare. In light of this, it is possible that the U.S. Federal Reserve is now incrementally less likely to raise the Federal Funds rate in September, but we continue to believe that conditions in the U.S. economy will remain healthy enough such that the Fed will take action this year.

It is worth reminding our clients that the U.S. economy is likely mid cycle as opposed to nearing the end of its expansion. Inflation remains benign, monetary policy remains loose, and wages have only begun to show slight improvements in this cycle. With this as a backdrop, we are viewing the move in the markets over the past few days as an opportunity to increase exposure to several current holdings, many of which represent high quality consumer brands. Within our equity portfolios, we are selling out of weaker relative strategy fits to buy stronger relative strategy fits. In multi-asset class portfolios, our willingness to step in and increase exposure to various names, as well as initiate new buys in names on our firedrill list, will likely result in a modest up-tick in overall equity exposure. As we move through the current cycle and address the realities of global growth, we continue to favor consumer names over industrial names.

Of course, this all bears watching with a close eye. There is no question that markets and economies have become more global. A key part of our job as an active manager is to be opportunistic around market volatility, and that is exactly what we are doing today.

- See more at: https://www.manning-napier.com/Corporate/Insights/Blogs/MarketsEconomy/Article/tabid/313/Article/346/Our-Perspective-on-Recent-Volatility.aspx#sthash.nvFStf5Y.dpuf

Ebrahim Busheri Director of Research

August 26th, 2015 @ 4:41pm by Jeff
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