Global stock markets have declined rapidly since the beginning of the year. Last fall we wrote that three outstanding issues stood in the way of the market to continue its’ upward path. They were:
- The slowing growth of the Chinese economy
- The continued decline in the price of oil
- The over-anxiousness of the market anticipating the Fed raising interest rates
All of these issues still appear to be on investor’s minds, yet it wouldn’t be far-fetched to say that all could also be resolved (or at least downgraded) in the near future. What could change things?
- The Chinese could announce a stimulus program for their economy
- OPEC could agree to modestly decrease oil production
- The Fed could re-set interest rate expectations for 2016 in their March meeting
If one or more of these conditions came to pass, it clearly would be a positive driver for the stock market. Yet it’s fair to note that since these issues have been ongoing for almost 6 months now, they have had an economic impact on our economy. The U.S. economy has showed signs of slowing the past six weeks, and two areas where it’s most apparent is in energy and technology spending. Yes, these are important areas, but they do not amount to the majority of our economy, which is really centered around consumer spending.
To put this slowdown in context, below is a chart of the U.S. Leading Economic Indicators which is a broad index comprised of ten different variables used to predict the economy over the next six months. First, we’d point out that this data is as of December, 2015 and it’s fair to say we’ve probably seen a decline since that time. But it’s also important to note that every year in the past five years we’ve had a temporary slow-down in growth, and in every case it’s either stabilized or rebounded.
The chart below looks at the same date, but goes back a full ten years and it gives us even more perspective. Except for the 2008/2009 recession, we’ve had a very consistent and modestly growing economy even with these perceived ups and downs.
Why do we think the glass is half full?
- Investor sentiment and stock market expectations are very low. Investing, much like gaming political primaries, is one of expectations and we believe they have been appropriately lowered.
- The U.S. consumer is in great shape despite what you hear from the politicians. Unemployment is low, wages are rising, home values are up, and gas prices are down. What more could one ask for?
- Innovation is alive and well in our country. There have been tremendous advances in both the biotech and renewable energy fields, both of which may have a powerful impact in the investment landscape going forward.
Are we trying to just wait out this storm? No, our strategy has been evolving since last September and we’ve been focused on three areas.
- Increasing our overall bond exposure, as well as buying longer term bond maturities which has helped stabilize portfolios during this time.
- Take advantage of the fall in energy prices to strategically change our holdings to ideas that focus on renewable energy.
- Sell a few of our underperforming holdings, and use the funds to re-purchase ideas with better prospects.
We hope that this commentary helps provide some comfort, yet understand that you still may have some questions and concerns. We invite clients and non-clients alike to reach out and let us know if you would like to talk.