Happy New Year!? The beginning of 2016 has gotten off to a bad start, and as a result we are close to a market correction (defined as a decline of 10% from the recent high). The market gyrations are due to a variety of exogenous events including a slowdown in China, North Korean hydrogen bomb rumors, declining oil prices and fears of a slowdown in the global economies. Here is our perspective on the latest events.
Generally speaking concerns with China are overblown. Economically, China is not a big factor in our domestic economy. We could stop doing business with China and the net effect to our GDP would be less than one percent. With that said, there is little risk of contagion to the major world markets.
North Korea caused some angst with this week’s headlines. With little more than speculation available, it is hard to quantify the ramifications of this event. Notwithstanding, there is little-to-no business being done with North Korea. Any country can cause a panic in the markets at any time. This is something we cannot plan for, but keeping proper hedges in your portfolio will assist in offsetting major declines.
It is important to remember that even though we are experiencing slow growth, we are still growing. There is little hint of a recession in our near future and we have a lot of reasons for optimism. Most importantly, we have low oil prices. Lower oil prices translate into a significant benefit to the consumer.
Cheaper oil prices will cause a shift of as much as $1.3 trillion from producers to consumers annually, according to The Economist magazine. The average American consumer who spends $3,000 a year on gasoline may save as much as $1,000, the equivalent of about a 2 percent increase in the yearly income of a typical household. (Excerpt from the Chicago Tribune)
This is a really big deal and ultimately bullish for stocks. It is as if there was a major tax cut passed in all of the global economies. Some countries will certainly suffer as their economies are attached to the production of oil, but most developed countries should see a nice improvement in GDP. The benefits of lower oil prices do take some time to filter down to the consumer.
Interest rates are at very low levels, and should rise slowly per the Fed minutes. Lastly, it is an election year, and there is little to expect from either the Administration or the Congress that would make matters worse. Additionally, there is hope that a new administration may provide tax relief for businesses and consumers next year.
We are compiling your 2015 annual report with a retrospective on the results, and should have it out to you sometime next week.
We hope you find this information informative and insightful. Please feel free to call if you have any questions or concerns about your portfolio.
