Dear Client/Prospect:
I sent out a short video about a week ago (which is also posted on our Facebook page) touching on several items regarding our 2016 Global Investment Outlook. It has certainly been a hairy first fifteen days of January and that’s putting it lightly. It is also disappointing that many experts on CNBC including Jim Cramer are quick to point the finger at the Federal Reserve and their lowering of rates last month. If it were that simple, we wouldn’t be having the continued volatility that we’ve experienced since August. The Fed hadn’t raised rates since 2008! This was necessary and expected so let me mention a few other items that probably hold more water than those opinions in regards to the U.S. markets’ struggles.
Here are three outlined reasons that we are having the volatility and current reversal in 2016:
1) Oil-the price of crude oil not only dropped to $40 a barrel, it has now dropped below $30 a barrel. Many experts and portfolio managers including myself did not see oil dropping to this level
2) China-the Shanghai market finally had their circuit breakers stopped and their GDP is slowing. This may cause a continuous freefall in their markets but then maybe just maybe they will hit a real bottom
3) Expected Corporate Earnings will be lower-as we enter earnings season this first quarter of 2016 we may not like what we see. I expect we will see mixed results as we get into the heart of this season but slowing growth will cause some concern
The price of crude oil has continued to drop. I touched on this in our November ’15 letter and it has continued to drop due to oversupply. The oversupply issue continues to cause problems and it does not appear that it’s going to improve in the short term. While this is good in filling up our gas tanks, it generally provides global uneasiness with our equity markets. When oil producers struggle to be profitable this causes massive layoffs which trickles down to many other parts of our global economy. Consumers will spend less and they will be tightening their belts. On a more positive note a gas station in Michigan became the first state to drop the price of unleaded below $1. Wow!
The China factor has continued to unnerve many domestic and global investors. With their market open only 25 years, they haven’t experienced many of the things that our U.S. markets have over the years. They also have too much government intervention which causes artificial volatility and market appreciation at times which makes it difficult to gauge what direction their markets may go. Perhaps China is being taught a lesson in free market policies. Sometimes you just need to let the markets run their course. As I finish up this letter though, China’s GDP reports 6.8% growth which is the slowest growth in 25 years. The markets are currently responding favorably because the rate was expected to be worse.
Economists and analysts expect corporate earnings to be lower as they start to report in January. We will have to see if this materializes but it certainly is a possibility. Many companies have had a great run over the last six and seven years not unlike the stock market and the question remains can they continue to rise. That depends on the management of these companies and in some cases their pipelines. Many stocks have reached all-time highs and many analysts question whether they can keep this up. That’s a valid point. I believe that some companies will exceed expectations and some will disappoint. This will result in a rather flat market for the next quarter or two before we see some growth again. I don’t believe we are entering a bear market or a cyclical bear market as it has been called. I believe that our economy is continuing to hold its own. The December jobs reported 292,000 jobs added and another 50,000 in upwards revisions for the previous months. That’s better than expected. We continue to be optimistic about equities albeit cautiously optimistic. Keep your head up and we hope you find our words helpful.
Sincerely,
J.B. L’Esperance, ChFC