We hope you and your families had an enjoyable holiday season and were able to find time for some relaxation and fun.
The financial market volatility in 2015 was challenging, but the start to 2016 has been decidedly worse. Stock markets around the world have declined sharply to begin the year with multiple triple-digit down days. The recent steps by the People’s Bank of China to devalue their Yuan (Renminbi) currency, along with the slowdown in China’s rate of growth, have sparked concerns China will drag the world economy into recession. The disarray in the Chinese stock market largely overwhelmed a better-than-expected jobs report here in the U.S.A. Our strong employment report reaffirmed the outlook for steady U.S. economic growth, even against the backdrop of global uncertainty. As we expected, energy prices have moved lower, but our research continues to forecast higher oil and gas prices over the next couple of years. The world today is spending $2 Trillion less on oil and gas than it was two years ago. Lower energy prices have historically been a positive for consumer service-focused economies, like the United States’, and savings on energy costs are likely to encourage consumer spending and future growth.
The stock market’s decline has been driven by concerns regarding the recent spate of contradictory economic data. This has precipitated an extreme level of negative sentiment. While China has been the focus of investor anxiety, many short-term traders have extrapolated some of the negative news to conclude a Chinese recession is imminent. The Chinese government is transitioning from a nation with under-developed institutions to a market-based system more reliant on consumer-oriented growth. It is unlikely the communist Chinese leadership will not employ every tool at their disposal to maintain a growing economy. As their policies mature and investors gain confidence that 1.4 Billion Chinese consumers are on sound footing, global markets can begin to recover from the year’s early losses.
The news that global growth is slowing, along with the financial market turmoil, lessens the likelihood Janet Yellen and the U.S. Federal Reserve Bank will raise interest rates aggressively in 2016, as they had indicated just last month. The removal of this interest rate uncertainty should be a positive for the markets.
For some time we have been concerned about the potential for a stock market decline like the one we are experiencing. This outlook led us to under-weight stock allocations in our diversified portfolios to effectively weather this volatility. Unsettled markets like these will create opportunities for the cash we have recently raised. As always, the preservation of our client’s lifestyle and wealth, over the long term, remains our focus.