Correction: An earlier version of this story misspelled Kent Gladding’s first name in the headline. It has been corrected.
Kent W. Gladding is director of investments at The Washington Trust Co.
He joined the Washington Trust team in 2009 and with his more than 15 years of experience directly managing mid to large-cap equity funds, the bank bills him as one of its industry expert.
Gladding talks with Providence Business News about the market’s rollercoaster ride last week, how it happened and what it should mean to investors.
PBN: How do you explain to your clients what happened last week in the market?
GLADDING: There has been a tremendous amount of price dislocation across the globe in currency markets, interest rate futures, commodities, and emerging markets in general including China. Much of this has been driven by the slowing of growth in China and its impact on all of these markets both directly and indirectly. Many hedge funds and investors have lost bets on the direction of price movements in these sectors which results in margin calls and short covering that requires the liquidation of higher quality collateral. Frequently that collateral or source of liquidity is U.S. stocks. Additionally, there is some amount of fear that the slowdown in China is contagious and ultimately will drag down the earnings of U.S. companies and their stock prices. This is not news however, with China being responsible for most negative earnings revisions for the last several quarters.
PBN: Besides the recent turmoil in the Chinese markets, and the plummeting price of oil, what are some other causes that have contributed to the drop?
GLADDING: We have not had a better than 10 percent correction in four years, which makes investors nervous and eager to lock in profits at the first sign of trouble. Exports do not represent a significant part of U.S. GDP (gross domestic product), however there may be some confusion on that point on the part of investors who worry that demand will fade for U.S. export goods due to weakness in emerging markets. The strong U.S. dollar also adds to the debt burden in emerging market countries, much of which is dollar denominated, at a time when many of those economies are reeling from weak commodity prices. To some extent, investors also worry that central banks around the world have exhausted their toolbox in terms of monetary policy solutions to global woes.
PBN: How do you think this drop will be weighted in the Fed’s possible decision to increase interest rates before year’s end?
GLADDING: It will undoubtedly be a factor in the Fed’s decision making. Stock market performance affects income levels and consumer confidence, both of which play into consumer spending which is an important driver of the economic cycle. Additionally, the ECB and the IMF would prefer the U.S. to hold the course on rate policy rather than take any action that would contribute to further dollar strength at their expense.
PBN: What’s your biggest takeaway from how the market rebounded after the initial plunge on Monday?
GLADDING: Hopefully the rebound on Monday from the opening low was an indication that the market was substantially oversold and represented panic selling that was disconnected from fundamentals. Additionally, many hedge funds needed to cover their short bets and bought the market at midday to close out their short positions which is a bullish sign.
PBN: What’s your advice to investors/your clients who might be feeling skittish?
GLADDING: Given the economic backdrop in the U.S., employment is improving, consumer confidence is up, banks are in great shape, energy is cheap, interest rates are low, corporate balance sheets are flush with cash, and inflation is low, this appears to be an excellent entry point investors with a one or two year time horizon. Nothing points to a recession that could really tank the equity market for an extended period. In light of the correction, stock prices are much more attractive.
