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Stocks closed down again Friday ahead of the long holiday weekend after disappointing earnings, more China worries, and plunging oil prices added to fears about slowing global growth. For the week, the S&P 500 dropped 2.17%, the Dow fell 2.19%, and the NASDAQ lost 3.34%.[i]
It’s certainly been a rough start to the year with multiple weeks of losses and several indexes pushing into 10%+ correction territory. During some market declines, a single culprit is responsible and attention can quickly shift to other issues. In this pullback, multiple factors are contributing to weakness:
Persistent lows in oil prices due to the combination of a supply glut and slowing global demand for oil. After plummeting for more than a year, oil prices have now hit 12-year lows below $30/barrel.[ii] Cheap oil is a boon to consumers who pay less at the pump, but it hits oil producers and ancillary sectors hard.
A Chinese economy in transition from a manufacturing and export-led high-growth period to a more stable, mature model based on services and domestic consumption.[iii] We’ve never seen a hybrid economy quite like it – halfway between Communism and Capitalism – undergo such a shift. The issues at stake are serious: Can Chinese leaders usher in a new period of growth without sending the economy into recession? Can China’s immature financial sector keep up? Answers will come eventually, but we can expect a lot of uncertainty along the way.
We should also keep in mind that markets have enjoyed multiple years of fairly reasonable volatility. Since volatility events tend to occur in clusters, it’s not so surprising that we’re seeing back-to-back events in financial markets.[iv]
Have stocks hit bottom? We can’t know for sure. This week, we’ll probably see more poor data out of China that could continue to rattle markets.[v] However, it’s possible that earnings season may help turn the tide. While Q4 profits are expected to be down on lower revenues, the bar may already be set so low that earnings surprises could give stocks a boost.[vi] When negativity is already baked into stock prices, even small surprises can shift investor sentiment.
Bottom line: Market corrections happen. They can be stressful and can test your resolve as an investor, but they are normal and healthy. We don’t know how long this correction will last or how low markets will go, but we are continually monitoring markets and will suggest prudent changes to investing strategies as necessary. If you have questions or concerns about your portfolio, please reach out to us, we’d love to hear from you.
ECONOMIC CALENDAR:
Monday: U.S. Markets Closed for Martin Luther King, Jr. Holiday
Tuesday: Housing Market Index, Treasury International Capital
Wednesday: Consumer Price Index, Housing Starts,
Thursday: Jobless Claims, EIA Petroleum Status Report, Philadelphia Fed Business Outlook Survey
Friday: PMI Manufacturing Index Flash, Existing Home Sales
HEADLINES:
Gasoline prices drop below $1 per gallon. Residents in some parts of Michigan officially became the first Americans to buy gas for less than a dollar in over a decade. High oil supplies and low demand may lead to more cheap gas this year.[vii]
Retail sales disappoint. December retail sales slumped unexpectedly as warmer weather cut into sales of winter gear and cheap gasoline weighed on service station business. After a 0.4% rise in November, sales dipped by 0.1% in December.[viii]
Consumer sentiment ticks upward. Despite stock market pullbacks and global worries, Americans’ view of the economy and their financial prospects improved slightly in January. Hopefully, that optimism will translate into more spending this quarter.[ix]
Business inventories fall. U.S. businesses sold through their stockpiles rather than replenishing as sales slipped. The decline in inventories could weigh on economic growth in the fourth quarter.[x]
[i] http://finance.yahoo.com/q/hp?s=%5EGSPC&a=00&b=8&c=2015&d=00&e=15&f=2015&g=d
http://finance.yahoo.com/q/hp?a=00&b=8&c=2015&d=00&e=15&f=2015&g=d&s=%5EDJI%2C+&ql=1
http://finance.yahoo.com/q/hp?a=00&b=8&c=2015&d=00&e=15&f=2015&g=d&s=%5EIXIC%2C+&ql=1
[ii] http://www.cnbc.com/2016/01/17/stock-futures-fall-anew-suggesting-more-weakness-in-major-markets.html
[iii] http://blog-imfdirect.imf.org/2015/10/05/managing-chinas-economic-transition/
[iv] http://www.proba.jussieu.fr/pageperso/ramacont/papers/clustering.pdf
[v] http://www.cnbc.com/2016/01/18/china-gdp-the-elephant-in-the-market.html
[vi] http://www.zacks.com/commentary/68003/weak-earnings-backdrop-for-stocks
[vii] http://abc7.com/news/price-for-gas-hit-47-cents-in-michigan-/1163995/
[viii] http://www.foxbusiness.com/markets/2016/01/15/u-s-retail-sales-end-2015-with-whimper.html
[ix] http://www.foxbusiness.com/markets/2016/01/15/consumer-sentiment-ticks-slightly-higher-in-january.html
[x] http://www.myfoxboston.com/news/us-business-stockpiles-and-sales-fall-in-november/21455657
