Market Update

When is a trunk not a storage space in a car? When the conversation is about a large, grey mammal that lives in India. Context matters. Similarly, in volatile markets like these, it’s important to view the most recent events in the context of more impactful, longer term trends. That is, the 10 percent decline in January—is it the beginning of a bear market or a normal correction in a bull market?

A major driver of markets in 2016 has been the price of oil. With oil prices looking like they would hit $20 a barrel, there was a bounce this past week when traders caught wind that oil-producing nations finally seem likely to cut production to stabilize prices. This will help move oil prices out of the spotlight and decouple them from influencing the market direction.

Furthermore, investors expected interest rates to be a major driver of markets this year. Specifically, they were concerned that raising rates too quickly could choke economic growth. This week, the Fed left the short-term interest rate unchanged due to continuing global economic weakness. Investors now believe that the Fed will raise rates one to three times in 2016 instead of the four to six originally anticipated, helping to ease concerns of an overly-aggressive rate hike policy.

Like the Fed, we are concerned about a faltering global recovery. However, it is clear that central banks are committed to stimulating their economies through further quantitative easing. Last week, European Central Bank’s Mario Draghi hinted that more stimulus would be discussed at the ECB’s March meeting due to concerns of deflation. This week the Bank of Japan announced negative interest rates. That is, banks pay interest on cash they leave sitting at the Bank of Japan. Also this week, China’s central bank took action, injecting more liquidity into its economy. Central banks clearly are taking action.

Ultimately, the market volatility we have seen the past month is not going away in the near term. But looking out over the rest of the year, good unemployment numbers overall (there is regional dislocation due to job losses in the energy sector) and persistent lower oil prices will result in higher U.S. consumer spending in other sectors. The positive earnings reports coming out during this earnings season may be reflective of this longer-term expectation. If this indeed is a developing trend, the U.S. consumer will stimulate domestic economic growth. As such, we believe that when the market recovers, the 10-percent decline in January will not be viewed as a change in trajectory, signaling the start of a bear market. Instead, it will be seen as a normal correction in a continuing bull market.

As always, please contact the office if you have any questions.