Just a week into 2016, and the market is off to a difficult start. If it feels like déjà vu, it is. Chinese market volatility has once again reared its ugly head and is causing anxiety in the U.S. markets. As of Thursday’s close, the S&P 500 is down 10% from its May highs. While we don’t want to dismiss the turmoil, it is worth noting not much has changed from August. Meaning the economy continues to chug along and stock valuations are fair.
What’s different this time? First, oil continues to make new lows. Second, the Federal Reserve raised rates 0.25% in December. Let’s address both.
Oil prices are still low. Lower oil prices provide a tailwind for consumer spending, which accounts for 70% of U.S. GDP, and very rarely (arguably never) lead to recessions. The other piece of good news is oil’s decline has stemmed from oversupply and not lack of demand. Lack of demand sends worrying economic signs, not too much supply.
The Fed’s rate hike. Federal Reserve inaction/action over the past few years has produced market volatility. We expect this to continue, unfortunately. On the plus side, we also expect the Fed to move very slowly compared to prior cycles. This means while rates could rise over the next 12-24 months, our base case calls for a slow ascent and that the overall environment will remain accommodative.
What’s the same this time? The U.S. economy remains on solid footing. Though we readily admit it’s acting more like the tortoise than the hare. GDP is growing in the 2.0%-2.5% range and is likely to do so again in 2016, disposable income has accelerated to near 4%, unemployment remains low fueled by solid job growth and the housing market is improving. These factors all pointing in the right direction lead us to the same conclusion from last time: a recession looks unlikely over the next 12-18 months.
The start to 2016 is not a welcome one, to be sure, but we think it has more elements of fear than fundamental merits. As always, we believe strongly that a balanced portfolio is key and are here to help.