Remember This Isn’t 2008

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After a seesaw week for stocks, Russ Koesterich explains why it's important to maintain perspective.

Investors may be feeling unnerved from the recent roller coaster ride in the markets.

Though stocks managed to close last week with modest gains after improving economic data and soothing comments from central bankers, U.S. equities experienced their most volatile week in years on continued concerns over China, global growth and deflation. The VIX Index, which measures U.S. equity market volatility, spiked to more than 50, the highest reading since the 2008 financial crisis.

However, as I write in my latest weekly commentary, “Keeping Firm Perspective as Markets Gyrate,” it’s important to maintain perspective. Recent U.S. economic data—including a solid July durable goods report and a sharp upward revision to second quarter gross domestic product (GDP)—paint a comforting picture, confirming a longer-term trend: The U.S. economy is still in relatively decent shape.

Despite fears over a China-led slowdown, the U.S. continues to demonstrate economic resilience. Put another way, for all the market’s twists and turns, and despite the economy’s headwinds and travails, this isn’t 2008.

A quick refresher: While stocks peaked in the fall of 2007, markets didn’t really start their meltdown until the following spring. By then, according to Bloomberg data, there were already several indicators flashing red, not only for the market but for the broader economy. For example, by May of 2008, leading economic indicators had been consistently falling for nearly two years, new orders data had been contracting for six months and unemployment had been rising for 18 months.

In contrast, the U.S. economy is now holding up relatively well, despite the challenges in China and some other emerging markets. True, nobody would confuse the current economy with the glory years of the late 1990s. But leading indicators are up more than 4 percent year-over-year, new orders are comfortably in expansion territory and job creation remains robust, as Bloomberg data show.

Although it’s still entirely possible to have a bear market despite a decent economy, I don’t believe the current correction marks the end of the bull market, especially considering solid growth and a lower likelihood for a September Federal Reserve (Fed) hike in interest rates.

Indeed, to the extent the U.S. avoids slipping into a China-induced recession, market fundamentals remain sound. In fact, indiscriminate selling has opened up pockets of value, including in European equities, high yield bonds and mega-cap stocks.

 

Russ Koesterich, CFA, is the Chief Investment Strategist for BlackRock. He is a regular contributor to The Blog.

This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed are as of the date indicated and may change as subsequent conditions vary. The information and opinions contained in this post are derived from proprietary and nonproprietary sources deemed by BlackRock to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. As such, no warranty of accuracy or reliability is given and no responsibility arising in any other way for errors and omissions (including responsibility to any person by reason of negligence) is accepted by BlackRock, its officers, employees or agents. This post may contain “forward-looking” information that is not purely historical in nature. Such information may include, among other things, projections and forecasts. There is no guarantee that any forecasts made will come to pass. Reliance upon information in this post is at the sole discretion of the reader.

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