2016 has started out not with a bang, but with a collision. What we have witnessed through the first 8 trading days of the year is a collision between expectations and reality.
Why is this happening? The conventional wisdom is that markets are concerned about the impact of a possible global slowdown on the earnings of corporations. Earnings declines have an uneven record of predicting recessions. History tells us that markets do not react positively to recessions. At this juncture, no one is forecasting that the U.S. economy is near a recession. That is good news.
Over the short term markets tend to correlate tightly, especially during times of euphoria or discouragement. Over time, markets will tend to reflect the underlying strength of their economies, but again, over the short term, all bets are off. This is what we are witnessing right now. There is concern about significantly slowing growth in China, which should not really affect the U.S. in any material way, other than to make the goods that they ship to us less expensive. Over the short-term, when those markets pull back, count on European and U.S. markets having a knee jerk reaction. That is the nature of markets, and we just have to tolerate it for the time being. On a positive note, as of Thursday afternoon, markets have recovered nearly all of yesterday’s losses.
The more germane concern is the continually sinking price of crude oil, off an additional 15% over the past 2 weeks. Although lower energy prices should be a net positive for our economy, it plays havoc with the Fed’s inflation targeting, as well as the banks and junk bond funds that have financed the fracking revolution. For a number of reasons it looks like the price of crude will continue to fall. No one expected a drop this steep, and that has unsettled markets. Eventually oil will find a floor and that should relieve some of the selling pressure.
Rest assured that we are monitoring this situation continuously, and have already taken some steps to protect your capital. Should you have concerns about your account, please call or drop us an email. We are here for you.