There’s no question that the New Year has been a rough one for markets near and far. This may or may not be solely because of China depending on which headlines you read. Today’s blog hopes to filter through some of the news to discuss where we are so far this year, decode some of what’s gone on in China and explore what else might be happening.
Year to Date
So far this year, few if any stock asset classes have been safe from the steady downward pace of the first handful of trading days. Early year losses range from 6-8% in most areas, with the exception of U.S. Real Estate, down just 2-3%. Bonds have remained positive with fairly strong returns for just a few weeks into the year.
The question is why and how long does this last? Tuesday’s positive moves showed some indications of a calming market, but no one truly knows the answer. What we can do is take a look at where we are and some of the reasons why.
China has dominated the financial headlines in late 2015/early 2016. As we wrote about last summer, the world’s second largest economy has faced slowing growth and increased difficulty in managing a capitalist market inside a communist state. Chinese leadership seem more motivated than ever to stabilize their economy, have their currency recognized among the world’s leading nations and encourage steadier participation in its stock market. It also wants to do this while controlling the flow of business and who has access to that market. Eventually, something has to give.
These growing pains have reached critical mass as we enter 2016. China’s first attempt at calming falling prices in the face of devaluing their currency led to implementing “circuit breakers” that closed their stock market when it slipped by 5% or more. The effort had the reverse effect, causing panicked selling by investors unsure of when they’d be able to access their money again after the breakers triggered several days in a row.
The restrictions proved much too stringent for a relatively volatile emerging market. By comparison, had those measure been in place in the third quarter of 2015, trading in China would have halted 20 times in China, nearly 1/3rd of all trading days for the quarter.
Stabilization now seems to be gaining some steam as the circuit breakers have been relaxed and the Chinese government seems willing to increase transparency (if only slightly so) and appoint more resources to proper financial control, but only time will tell whether they can manage to steer such a large ship successfully.
As I mentioned in the open, not all blame can be assigned to one country. Energy prices have been falling consistently for more than a year and a half causing all kinds of uncertainty in markets. During Tuesday’s trading oil prices dipped below $30/barrel for the first time since 2003 as suppliers continue to produce oil despite the considerable glut in supply.
This seems to be more of a geo-political game than anything else. In an attempt to completely disrupt the Russian economy, choke off rapidly growing oil drilling in North America, and discourage Iran from reemerging as a major global oil producer, Saudi Arabia and other members of OPEC have continued production at a rate sure to drive down prices in order to discourage the continued growth of exploration and production in other parts of the world. It’s worked in some parts of the world, less so in others.
What’s to Come
There are countless other world political, economic, corporate and social factors that play a role in the market volatility we’ve seen. In fact, all of those factors work in concert to determine what investors think any given company is worth at any given time in addition to the actual productivity and fundamentals of the company itself.
The market will improve or continue to retract based solely on the unknown and the uncertain. All that is known is priced into markets around the globe at any given moment. As such, it becomes an incredibly difficult task to both see the future and, more importantly, know how the market will react to that future with absolute certainty.
In the short term, we hope to see some steadying as corporate earnings are released, more guidance comes from the Fed and we learn a little more about China’s path forward and whether or not Europe’s budding recovery will hold.
As the risk of sounding like a broken record, the best way to benefit over the long term from these fluctuations is to stay broadly diversified in order to smooth out the rough waters as much as humanly possible. It’s important to stick to a discipline that helps us buy into asset classes that have the most opportunity to grow using profits from those asset classes who have grown the most of late.
The alternatives are to a) know the future and how the market will react as a whole to that knowledge or b) be in cash or U.S. Treasuries that over time will lose value as the buying power of that money decreases with inflation.