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Bay Area Research Rant: Sell Off Probably Means Interest Rate Hikes on Ice

By Garrick Brown, Vice President of Research – West Region

StockMarket-resized-600At the time that I completedStockMarket this latest diatribe this morning (10 AM, PST), the Dow Jones had plummeted 1,000 points at opening but was in the midst of a rally and was just down 150 points, give or take. Sadly, it sounds like I will be cheated out of my opportunity to tell everyone to panic and join the sell off. To paraphrase the last communications of one of the rogue warriors in Apocalypse Now, “Sell the house. Sell the car. Sell the kids…” Of course, this was because I really was hoping to buy a lot of stock with whatever I could scrape together today. Oh wait, I’m just an analyst so that means my purchases will probably be limited to penny stocks.

In all seriousness, the real challenge of the global selloff that reached Wall Street by this morning is that clearly the Asian markets are overreacting to slowing growth in China. But what we are really talking about is a slowdown from roughly 10% GDP growth to something around 6.7%. Now is that going to drop further? Probably, the Chinese economy has become too big for just a few moves by the central government to fix with just a few manipulations. That’s part of the problem but it’s not necessarily a bad thing if you are a free market type.

But low level panic has clearly gripped the Asian stock markets and this carried over to Europe. And, of course, we are seeing its impact here as well. But remember… even if we are talking about a growth rate of say 5% for the Chinese economy going forward (and I would guess that estimate is not far off), we are still talking about levels of growth roughly twice that of what we are seeing in the United States. It’s a level of growth that nearly every industrialized nation on earth would probably willingly go to war for.

This is a freak out, pure and simple. Certainly there are real causes for concern in China, but for our markets to react this way just shows you how jittery our investors are. Remember that the US economy is still driven (70% +/-) by our own consumer spending. The impact of China’s slowing economy on us (other than our own panicked reactions) should be minimal. But that assumes human beings and markets are rational… which, all too often, they aren’t. But realistically, barring a panic that snowballs into its own disaster, the one place where we will feel real pain is in the energy industry, where things are just getting worse in terms of a supply and demand imbalance. But the kicker to that one is that the net positives to the U.S. economy as the price of oil nosedives outweigh the net negatives. This isn’t true if you happen to be in a place like Houston or any of the other local economies that are driven by the energy sector, but for the rest of us what is happening to the price of oil will continue to reap real dividends.

But even as I write this, the Dow continues to rally and many of my points will likely be moot by the time you read this. We haven’t had a market correction in four years. We used to average roughly one a year. This is long overdue. Today is the one year anniversary of the Napa earthquake. I remember seeing one of the Cal Poly seismologists after that 6.0 magnitude quake saying that when pressure builds up it has to go somewhere; “better it is released in a series of smaller incidents than with one big disaster.” This strikes me as the case here. Of course, it appears that American investors are already hedging their bets that this is the case and are buying some pretty good bargains… assuming the market continues to rally. Hold on long enough and it always does.

This certainly won’t be the end of it. Expect a wild ride ahead and a whole lot of uncertainty. But here is one thing I would bet on… forget interest rate hikes by the Fed in September. I would guess forget interest hikes by the Fed this year at all. If the global selloff does nothing else, and let’s hope this is the case, the events of the last few days have probably done Janet Yellen a big favor in clarifying what was a pretty murky path.

This post is commentary from the latest weekly edition of our Bay Area Research Rant, which you can subscribe to for free by e-mailing garrick.brown@cushwake.com.

garrick-brownGarrick joined Cushman & Wakefield (formerly DTZ / Cassidy Turley) in October 2010. He serves as Vice President of Retail Research for the Americas. He speaks frequently at industry events and has been a keynote speaker at symposiums, conferences and market forecasting events for groups like the Appraisal Institute, Urban Land Institute, CREW, ICSC and PRSM. He is also a member of Lambda Alpha International, an invitation-only land use society for those who are involved in the ownership, management, regulation and conservation of land, but also those who are involved in its development, redevelopment and preservation.

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