China’s economic slowdown (recession?) and resulting stock market crash have triggered a sell-off in stocks across the globe. Fear indicators are elevated to levels rivaling the conditions of 2008, when the US financial system was on the ropes.
While China’s slowdown has real implications on global growth, the spillover effects to our economy seem overblown. Sure, there will be casualties in a global economic slowdown such as materials, commodities, and energy producing stocks. But there are also spillover effects that should have a positive impact on our economy.
Lower energy prices, for example, is a positive factor for the US consumer. Once the summer demand on gasoline dissipates, we expect gasoline prices around the nation to drop into the sub-three dollar range per gallon. This cost savings at the pump translates to more discretionary dollars for the consumer. Companies will enjoy lower input costs for manufacturing and transport as well.
One of the catalysts for recent global volatility is China’s recent decision to un-peg the yuan from the dollar. The Chinese currency quickly sank in value, causing ripples in the world currency markets. But the lower yuan means we’ll be paying less for Chinese-made goods in the near future. Lower prices are disinflationary, which means the Fed may not be so inclined to raise interest rates. In fact, Barclay’s revised their estimate for Fed action to September 2016.
We always hate to invoke the “It’s Different This Time” (IDTT) rationale, but compared to 2008, it really is. Just like 2008 was different than 2002, which was different than 1987, which was different than 1974. Corrections and bears are always different.
Hang in there!