Equity markets have pulled back during the past few weeks, and we have seen a significant increase in volatility. As we enter the Labor Day weekend I ask myself if this is a market correction or if there is something more to worry about when the markets return to trading next Tuesday. Downturns and intermittent bouts of volatility are normal for markets and can even provide opportunities. However, we have to ask what makes a downturn something more than just a 10% drop in equity prices that can recover in a matter of weeks or months. The majority of time it is the presence of a recession that causes further deterioration in equity prices. In an effort to review the likelihood of a further drop in prices, I have put together some points explaining the chances of a recession. A recession is unlikely in the U.S. at this time, and therefore it is less likely that the current downturn will intensify.
As the markets meander through the slower summer months, it becomes a good time to check-in on where we have been. I have compiled 10 major asset class indexes and compared the returns in a quilt format. The returns for each calendar year and a longer term view of annualized returns are provided.
Three months ago I found myself scrolling through Chinese web pages to locate margin data from the Shanghai Stock Exchange, and at that time there was a rapid expansion. However, today we see a different story. Over the past few months margin debt balances reached new highs and have contracted substantially.
It has been an ugly day in the markets after this morning's news that Chinese officials plan to tighten up rules on stock trading. All major U.S. indexes are down over 1% as I write this, and volatility has popped as the CBOE VIX Index is up 13% today. I took some time to look into why markets would react so strongly to action by Chinese regulators, and found out quickly that there has been rapid expansion in margin debt in China.
Margin debt as measured and reported by the Shanghai Stock Exchange has increased by 337% since 4/15/14. After Google kindly translated the pages from Chinese, I was able to create a chart of the margin debt as measured in the local currency. As one can see in the chart below, the growth of margin in the Chinese exchange has exploded recently.
You might have seen these letters behind someone's name, on TV, or even on our website. As the first post of a series, I will be describing what this designation is, and why it matters to our clients.
The letters CFA® stand for Chartered Financial Analyst, and is granted to professionals who qualify under the CFA Institute's criteria. The CFA designation requires passing 3 rigorous exams, 48 months of professional experience, adhering to a strict code of ethics, and becoming a member of the CFA Institute and local society.