Dear Valued Investor:
The ongoing market volatility and global growth concerns continue to challenge our confidence and ability to remain optimistic. The heightened volatility of the second half of 2015, which has carried over into 2016, has turned our focus toward the risks and away from the potential opportunities that may emerge. Although these episodes may seem difficult to weather in the short term, we must strive to direct our attention to our long-term goals and remain committed to them.
Yet today, the list of investor worries is a long one. U.S. economic growth during the final three months of 2015 was lackluster, fueling recession concerns. Domestic earnings have been falling. The Federal Reserve (Fed) seems intent on pursuing additional interest rate hikes, despite the message from financial markets that it might be a mistake. Oil prices may remain low for some time as we endure the slow process of supply adjustment, which suggests more energy company bankruptcies may be ahead. In addition, the uncertainty surrounding the U.S. presidential election may be weighing on confidence, as some of the candidates’ proposals are not perceived to be market-friendly.
Looking abroad, China has fumbled its attempts to intervene and stabilize its financial and currency markets as the bumpy transition to a more services-based, consumer-oriented economy continues. Meanwhile, China’s economy is probably growing at a rate closer to 5-6% than its reported 6.5-7%, based on the most reliable and timely economic data available. European economic growth has stalled and the health of European banks is being called into question, largely because of exposure to oil and China. Japan’s economy also contracted in the fourth quarter of 2015.
However, bright spots remain. The U.S. consumer and the services sector of the economy remain solid, evidenced by Friday’s (February 12) strong retail sales report for January 2016. Job gains have been steady and lifted wages, supporting consumer spending and home values. Low gas prices have also helped. Strength in the U.S. dollar, which has hurt exports and weighed on earnings for U.S-based multinational corporations, has abated. We also take some comfort in corporate fundamentals. Corporate profits are pausing–largely because of temporary factors–but are not collapsing. Excluding the commodity sectors, S&P 500 earnings are on track to rise a respectable 4% year over year in the fourth quarter of 2015 based on Thomson-tracked consensus estimates. Overall earnings are potentially poised to resume growth in the second half of 2016, and corporate balance sheets remain in excellent shape outside of the energy sector.
As disappointing as the start to this year has been, the year-to-date decline for the broad stock market, as measured by the S&P 500, is still less than the average maximum decline in any given calendar year (14%) or in any positive year (11%). Going back 40 years, the S&P 500 has been down 5% or more after the first six weeks of the year 10 other times besides this year. The rest of the year was down more than 10% only once, in 2008, so a big drop from here would be extremely rare by historical standards. Also keep in mind the long-term average gain for stocks is about 8%, which includes a lot of ups and downs.
It’s important to remember that the best investment opportunities are often at points when fear is at its highest, which is why we look at sentiment indicators to identify points where the sellers might be exhausted. This idea was captured well by Warren Buffett in October 2008 when he said, “Be fearful when others are greedy, and be greedy when others are fearful.” There is a lot of fear out there, suggesting that greed may be more profitable.
It’s important to continue to monitor a variety of market and economic indicators for signs of a recession, and the odds now remain low. Yet episodes of heightened volatility, such as we are experiencing now, do weigh on our confidence regarding what may lie ahead. What remains key to managing these market environments is maintaining a long-term perspective, staying diversified, and committing to a well-formulated investment plan.
As always, if you have any questions, I encourage you to contact your financial advisor.
Sincerely,
John Canally, CFA
SVP, Chief Economic Strategist
LPL Research
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The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual security. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results.
Economic forecasts set forth may not develop as predicted.
Investing in stock includes numerous specific risks including: the fluctuation of dividend, loss of principal, and potential liquidity of the investment in a falling market.
Because of its narrow focus, specialty sector investing, such as healthcare, financials, or energy, will be subject to greater volatility than investing more broadly across many sectors and companies.
There is no guarantee that a diversified portfolio will enhance overall returns or outperform a nondiversified portfolio. Diversification does not ensure against market risk.
Investing in foreign and emerging markets securities involves special additional risks. These risks include, but are not limited to, currency risk, political risk, and risk associated with varying accounting standards. Investing in emerging markets may accentuate these risks.
Commodity-linked investments may be more volatile and less liquid than the underlying instruments or measure, and their value may be affected by the performance of the overall commodities baskets, as well as weather, geopolitical events, and regulatory developments.
This research material has been prepared by LPL Financial.
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