Recent headlines have been quick to report a global sell off in equity securities. While there are many variables seeking to disrupt capital markets, only a handful may be attributed to the significance of the recent pullback in asset pricing.
The three fears most aggressively permeating equity markets have resulted in the tightest range of returns for the S&P 500 in the last 50 years:
1. The Greek monetary crisis and ensuing dismantle of the Euro Area. Greece, after defaulting on their loan to the International Monetary Fund, has accepted more pronounced austerity measures in their debt servicing. They have received emergency liquidity, and for the moment, the uncertainty of European dissolution has largely dissipated.
2. Prominent fears of interest rate normalization. Investors are concerned with a premature interest rate hike by the Fed that could potentially drive the economy into a relapsed recession. The Fed has reiterated however that the path to interest rate normalization will be of greater concern to capital markets than the timing and magnitude of the first rate hike. Equity securities on average have appreciated near 10% during the first 12 months of an interest rate hike, similarly bull markets do not dissipate for two and a half years after such an event.
3. The correction within Chinese equity pricing and deceleration of domestic production will put greater deflationary pressures on commodity pricing, which may be indicative of a global collapse in equity markets. The Purchasing Manager’s Index (PMI) which indicates contraction or expansion within industrial production and services of an economy has signaled growth not only within developed nations – but also in that of Chinese and emerging markets. (World PMI; 53.4, EU PMI; 54.5, U.S. PMI; 55.7, China PMI; 50.2, EM PMI; 50.2. A value greater than 50 indicates expansion while a value below depicts contraction.)