It has continued to be a rocky start to 2016 in the financial markets. The main culprit at the beginning of the year was China and data that suggested a continued slowdown in manufacturing and overall economic output. This is partially intended as they have been in a continued focus on transition from such a full manufacturing economy to a more consumer-based society, but the numbers have been more negative than hoped for. In addition to that there was further devaluing of their currency and the markets were spooked there influenced heavily by traders with short term emotional selling, which triggered emotional selling here in the US as well. As it was in August when China related concerns were also at the forefront, there are so many unknowns regarding Chinese data and also the theories on how a slowdown there will continue to impact commodities, oil, emerging markets (who supply many of the commodities, metals, and natural resources), and ultimately the developed economies of the US and Europe. China is not going to be in a true recession (at least 2 quarters of negative GDP growth), but their slowdown from double digit growth in the 2000’s to projections in the 6-7% range this year that now some say could go even lower, makes it feel like a recession by their standards.
In general this Chinese trigger has spooked assets globally. Investor confidence is fragile and this has led to declines in all categories of stocks and other “risk assets”. Oil has continued to see declines as global supply continues to surpass global demand. For all of the complaints about falling oil prices and their obvious negative impact on oil companies and certain countries, it seems overlooked that lower oil prices are a big benefit to consumers and other industries, such as airlines. Savings at the pump over time should lead to some increases in consumer spending. US exports to China represent only about 1% of US GDP, so a Chinese slowdown is not catastrophic for our growth by itself, and generally US economic data, including housing prices, auto sales and employment, have been pretty strong (Federal Reserve Economic Data). The broad US stock market is down a little over 11% YTD with large company stocks holding up a bit better than small ones like last year, but with growth stocks doing a bit worse than value, unlike last year. All sectors are negative, except for utilities, with financial stocks and tech hit hardest. Foreign markets have generally performed worse than the US to start the year, with the MSCI World (not including US) down 12.43% through February 11. Bonds have generally been slightly positive (with the exception of High Yield). Commodities also continue to suffer. (Morningstar Indexes, Will China’s malaise spread to the U.S. economy? – Morningstar). For more market updates at any time visit the Market & Economic Updates section of our website.
As always, the temptation to sell in declining markets is understandable. Headlines, like “Sell everything”, make us question our long-term focus and bring painful memories of 2008. This piece, from American Funds, reminds us just how frequent 5-20% declines have been historically and how robust the recoveries have been for those who stuck to their long-term plan. I like the Warren Buffet quote “The market is the most efficient mechanism anywhere in the world for transferring wealth from impatient people to patient people.” The biggest challenge with dramatic moves away from your long term allocation plan is the difficulty with knowing when to get back in. Market recoveries are historically quick and come before everything “feels right”. I remember March of 2009 with the Dow around 6600 and reading predictions of people saying it could go to 4000 and below. The temptation to cut losses and sell out was strong. From the bottom on March 9th, the Dow was up over 10% within a week, 23% within a month, and 33% within 3 months (Yahoo Finance charts). What I remember most were articles telling people that it was a short term rally that would lead to a double dip recession. That drop back never came and many investors who should have been long-term investors sat on the sidelines missing out on the significant gains we have seen the last 6 years.
That being said, there are certainly concerns that I have that the fragile nature of investor sentiment could lead to further short-term declines. For those of you who are having difficulty stomaching the volatility, let’s discuss your accounts in the context of your long-term financial plans. An allocation shift to more conservative positions or increased use of risk-reduction types of accounts may be worth a conversation, especially if you feel that your goals, time horizon, or something else about your situation has shifted meaningfully.
As always, please let us know if we can help in any way. All the best, Jeff