Fortress America?

Can the US economy continue to plow ahead against global headwinds of the slowing economies of China, Europe and the developing world? Can it withstand the rapid devaluation of the oil industry and commodity prices? And most important of all, can it remain healthy during a period of rising interest rates?

On Monday and Tuesday the vote seemed to be a resounding no with stocks falling 11% or so on a Chinese market tumble. However, Wednesday and Thursday, voters turned more sanguine with the help of a government report showing that the US economy grew 3.7% considerably more than previously estimated (2.3%) in the second quarter.

Lack of transparency and credibility make analysis of the Chinese economy challenging to say the least. The government’s official estimate for this year’s GDP growth is 7%. MarketWatch quotes an Evercore ISI study that shows China’s growth down 1.1% for the year. If ISI’s data is closer to the truth, then China’s economy is not likely to rebound any time soon.

China’s slow down will undoubtedly impact our economy, but just how severely depends upon how fast multi-nationals heavily exposed to China can adapt. A New York Times article notes that Caterpillar rapidly cut back factory production when sales of construction equipment in China dropped by half in the first six months of the year. The article points out that smartphone makers, automobile manufacturers and retailers also wonder about the staying power of Chinese buyers, even if it is not shaking their bottom line at this point.

The impact of China’s slowing has indirect impact on the economy as well. Russia had been turning to China to fill the financial gap left by low oil prices and Western sanctions. Venezuela, Nigeria and Ukraine have been heavily dependent on investments and low-cost loans from China. The uncertainty over China could limit the maneuvering room for officials to address the sluggish Brazilian economy at a time when resentment is festering over proposed austerity measures.”

Prospects for the European economy are mixed as the Central Bank moves into its version of quantitative easing – or creating money to buy financial assets. The Economist points out the slowdown in China “will tend to hold Germany back since the Chinese market has been a lucrative one for its exports of investment goods and luxury cars. On the other hand, the decision to rescue Greece in its third bail-out in five years removes uncertainty about a possible disruptive exit from the monetary union, at least for the time being.”

The price of oil has tumbled 58% this year, reaching a six-year low earlier this week according to Bloomberg. The fall represents a doubled edged sword of sorts. The impact on the oil industry has been brutal which will have a measurable effect on the US economy in terms of jobs and exports. On the other hand, the drop in consumer energy costs could improve US GDP by as much as 0.2% if prices remain low, economists say.

The big question however, is as it has been for years now, when the Federal Reserve will begin its program of raising rates from near 0%. The largest hurdle they face in starting their program surprisingly is less about the strength of the US economy and recent global market turmoil than it is about the stubbornly low pace of inflation in this country. Inflation has remained below the Fed’s target of 2% for more than 3 years.

Historically, the Fed does not like to change policy during market uncertainty and volatility. On Wednesday, William Dudley, president of the New York Fed, said “the decision to begin the normalization process at the September FOMC meeting seems less compelling to me than it was a few weeks ago.” He also said that the case for liftoff next month could improve as more information comes in about markets and international developments, and that he continues to hope to lift rates this year, according to Bloomberg.

Expressing a different perspective later in the week, St. Louis Fed President James Bullard said on Bloomberg TV that while world financial markets are volatile, US fundamentals are good and the interest rate-setting Federal Open Market Committee shouldn’t alter its forecast for the economy. “The key question for the committee is — how much would you want to change the outlook based on the volatility that we’ve seen over the last 10 days, and I think the answer to that is going to be: not very much. You’ve really got the same trajectory that the committee will be looking at that we were looking at before, so why would we change strategy, which was basically to lift off at some point?”

While markets don’t like uncertainty, this period of domestic and global uncertainty is arguably short-lived as we expect the Federal Reserve to play their cards in the next month or two. Once they do so investors can go about their normal activities of evaluating country, currency, credit, and earnings and other risks.

But if you invest as we do, you needn’t worry about these kinds of risk. By owning most every company in the world that matters we achieve diversification and market efficiency capturing virtually all human commercial ingenuity and innovation to build wealth. Our process determines how much of that horsepower is required to meet their goals limiting volatility to the amount necessary.