Welcome to 2016!
What a wild ride for the markets to start the year. As bad as 2015 was for most investors, 2016 seems to be giving investors a dose of the same illness: volatility, volatility and more volatility.
2015 was one of the few years on record in which all asset classes performed poorly. The S&P 500, Russell 2000 and the Dow Jones were all negative. Surprisingly, even investing legend Warren Buffet’s fund had a losing year finishing the year down 12.48%.
So for many investors, 2015 is a year to forget. But should we expect more of the same for 2016? I want to share with you my thoughts on 2016.
Things to watch in 2016:
- A slowdown in China: China’s GDP growth is on the decline, slipping under 7% for the first time in a while. The New York Times reported that the majority of manufacturers in China have stopped investing in new factories and equipment, which points to a contracting economy. All of this falls on the heels of a manufacturing infrastructure boom. To put it in perspective, China poured more cement between 2011 and 2013 than the United States did in the whole of the 20th This has led to “ghost cities” in China where massive development projects sit empty because there is not enough demand to meet the supply. China’s communist government has failed at propping up its stock market. As a last resort the Chinese government is devaluing its currency to help support its struggling exporters. This has adverse ripple effects across the globe, and was a major cause of our market correction here in the U.S. back in August of 2015.
- Earnings leave much to be desired: Between the oil/energy collapse and a very strong dollar, many analysts believe when companies report fourth-quarter results, it will show a second consecutive quarter of earnings decline. 2015 could be the first year since 2009 to have an annual earnings decline. Not a good sign.
- The Federal Reserve is raising rates: Even though the plan is for a gradual rate increase, we have never really been in this type of rate environment before. Due to this low interest rate environment, the stock market has seen tremendous growth since March of 2009, increasing more than 200%. Without the “life support” of the Federal Reserve, which goes by the official term quantitative easing (printing of money), we should expect much more volatility in 2016. Added to that, we are entering into a period where the Feds are now raising rates instead of lowering rates, which should favor a declining market in the near term. A stronger dollar will also pressure the earnings of multinational U.S. companies (think Coca-Cola, Apple, etc.)
- Seven years of tremendous growth: Since the bottom of 2009, the stock market has seen unprecedented growth. We are currently in the 3rd longest bull market in history, falling behind the WW2 recovery and the 90’s boom. As bull markets get longer and longer, investors get jittery. When stocks become overvalued they tend to resort back to a normal price range. Unfortunately, a 20% decline in the stock market would be considered a “normal” correction when valuations are as high as they hit in 2015.
So where does that leave us as investors? While there is certainly much to be concerned about, knowing you have a solid plan in place to help navigate through volatile markets can make all the difference. 2016 will more than likely give us more volatility and downward movement in the overall stock market. Having a portion of your portfolio in cash to take advantage of what could be much lower stock prices in 2016 may very well prove to be a successful investment strategy.
Cheers to a new year!