An Investment Update
The first two weeks of 2016 have been eventful for investors. Domestic stocks tumbled across the board, though small caps seemed to get hit the hardest, signaling the market’s disinterest in riskier companies. The rout was enough to drop all three domestic indices more than 10% below their 52-week intraday highs and into correction territory. Consumer discretionary stocks were among the weakest, which could be a sign that lower gas prices aren’t enough to counteract the lack of wage growth in the labor market.
In addition, crude oil dropped below $30 a barrel for the first time in more than 10 years, and the world’s second largest economy continues to show signs of weakness. Concern remains that turbulence among China’s stocks and currency will spread to the global economy. Market observers will likely pay extra attention to the upcoming earnings announcements as an indicator of the economy’s trajectory.
The most recent jobs report, released January 8, was a bright spot, with nonfarm payrolls rising more than expected in December. Unemployment has now fallen to 5%, indicating the labor market recovery remains on track. The Federal Reserve’s Beige Book survey indicated modest- to-moderate expansion for much of the country over the past six weeks, with wage and price pressures remaining largely in check. However, this bit of good news was overshadowed by developments in China that brought trading on the Shanghai Composite Index to a complete halt twice in one week.
Our outlook has been that volatility is to be expected this year, given the headwinds facing the domestic economy and the markets. That said, Chief Investment Strategist Jeff Saut believes the downside may be contained on a short-term basis given the oversold nature of the market, adding that it is possible we are still in the middle of a 17- to 25-session sell-off.
Because of our expectation of volatility (driven by the long – six year – stock market run up), last year we did recommend, where suitable, reducing portfolio risk modestly. This direction helps provide additional “cushion” during periods of volatility. In addition, some bargain buying may make sense. To support a disciplined approach, we generally set targets for bargain buying before volatility occurs. Also, such “buy lows” are individualized for each client, based on overall portfolio construction. All that said, you may us contacting you to indicate that you’ve “bought at a bargain.”
Please do contact us with questions or concerns. We understand that volatility and negative world news are far from enjoyable.