Well 2016 is certainly starting off on the wrong foot. The cause is mostly recent exogenous events including Saudi Arabia/Iran dispute, North Korea nuclear test, and continued concern over China’s economy. China’s economy has been on my radar for a while but no one could have predicted Saudi Arabia executing 4 dozen political prisoners and N. Korea detonating a nuke.
Some perspective: While the cause(s) are different, the current volatility is no worse than what we saw to open 2015, when the stock market went down 2.53% from 1/5/15 through 1/6/15 (S&P500) and again in the declines we experienced in August and October 2015 (see chart below courtesy of Raymond James Associates and Stockcharts.com)
Despite all that volatility last year, the S&P500 finished flat for the year (-0.73% on price, +1.41% after dividends source: Argus Research)
Leaving the geo-political events aside for the moment, the big concern is China’s economy. It helps to understand the relationship of China’s economy to the US economy. Approximately 12% of the US economy comes from exports. China accounts for only 7% (approximately) of our total exports. Most of these exports to China are industrial and manufacturing related (heavy equipment, cement, etc.) So the most direct impact of the slowdown in China’s economy is on the manufacturing sector in the US, which has seen a significant slowdown as well. However, the bulk of the US economy (approximately 88%) is from the services sector, which is not significantly tied to China. (source: US Dept of Commerce)
The US economy, as stated in my 2016 Outlook, remains in a below-trend growth environment which can be sustained even with the slowdown in China. Employment seems stable (ADP private payrolls for Dec 2015 up 257,000 vs. 192,000 estimate; Challenger, Gray & Christmas state that announced job cuts in December 2015 were the lowest monthly number since 2000). Consumer confidence rose to 96.5 in December 2015 up from 90.4 in November. “As 2015 draws to a close, consumers’ assessment of the current state of the economy remains positive, particularly their assessment of the job market,” Lynn Franco, director of economic indicators at the Conference Board. Interest rates remain historically low, which should continue to support real estate values and vehicle (cars & truck) sales.
In summary, while disconcerting and worth paying close attention to, I believe the volatility this week does not merit any significant action at the moment. I continue to monitor the markets and your portfolio and will let you know when we need to make any change.
Sources: Raymond James Associates, CNBC, Stockcharts.com, US Dept of Commerce
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