PMC Weekly Review - January 15, 2016
A new year rings in many expected occurrences, including countdowns, fresh starts, and New Year’s resolutions. However, an unexpected and unwelcome kick off to 2016 has been the market turbulence and sharp selloffs during the first two weeks of the year. With economic news and market action in China both negative on the first trading day, markets opened sizably lower, and the selling pressure only escalated from there.
What followed was the worst opening week in history! The S&P 500 plunged 6%, and the Dow Jones Industrial Average fell 1079 points in five days. Entering the second week, we were greeted with even higher volatility, as markets sold off once again. To understand where markets may go from here, it’s important to identify what led to the selloff and assess investor sentiment surrounding this early 2016 action.
If markets could make resolutions, China’s definitely would have been to reduce the volatility that plagued its retail-driven exchanges in the past year. Unfortunately, their policy makers’ remedy, adding circuit breakers, with a daily floor of 7%, had the opposite impact, and failed decidedly during their introductory week. Chinese traders seemed more enticed to test the boundary—and did so twice in the first week—leading to the mechanism’s prompt suspension after just four days.
More significantly, concerns of slowing growth in the Chinese economy have restrained global equities for much of the past year. Soft manufacturing data and further weakening of the Chinese currency only add to the fears of the country’s ongoing struggles.
As was the case for much of 2015, the selloff in oil has been center stage in January. Following its 30% decline in 2015, crude oil kicked off the first week with a loss of 10%. In week two, it flirted with and then cracked $30, reaching prices not seen since 2003. Many energy experts are calling for “lower for longer,” while others believe the price will stabilize before rebounding higher. A bright spot in oil’s decline is the potential stimulus provided to retailers as consumers now have more to spend with the substantial drop in gasoline prices.
The December employment report served as a much-needed positive economic reading in week one. There were 292,000 jobs added in the past month, and prior month totals were revised higher by 50,000, closing out the second strongest year of job gains since 1999. One concern about the report was that it may have been too much good news for a market focused heavily on the Federal Open Market Committee’s (FOMC’s) tightening schedule and next rate increase.
One thing is certain: it is still very early in 2016. Concerns over Chinese and global growth, the decline in crude oil, and the Federal Reserve’s (Fed’s) next action likely all will drive markets in the short term. Heightened volatility may continue. However, as we find markets under pressure, history has shown it’s often better to tune out the short-term noise, and focus on long term strategic positioning.
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