Well, 2016 has certainly not been dull… I have spent some time fielding concerns from a few exasperated clients, as equities plunged into a sea of red. But does this recent under-performance in equities, particularly large US stocks, mean catastrophe for your portfolios? My standard answer is: “not if they are diversified… and patient.”
Now that 2016 is in full swing, let’s channel our inner “Sherlock Holmes” to examine the worst global market selloff since the great financial crisis of 2008. It’s hard to figure out why this is happened and who’s to blame.
Here are 11 of the most likely suspects:
It was OPEC
The refusal to limit supply allowed oil prices to keep charging down, to levels that almost nobody had planned for. And, while this is good for consumers and for any country that imports oil; the short-term impact on everyone else (and particularly on the US economy, which has come to rely on the energy industry for its growth) continues to be disastrous. As I write this, Russia and Saudi Arabia have agreed to limit production… And the stock market went up 200 points!
It was sovereign wealth funds (SWF’s)
Unless you are into global banking, you probably never heard of these SWF’s. They were built up largely with the wealth generated from petrodollars. Oil price declines have caused many funds to start selling before the bottom falls out in their fund loses value. They would generally start selling their most liquid investment, that showed a profit, like Japanese or US stocks. In Japan, SWF fire sales have been openly blamed for the sell-off.
It was the Chinese stock market
The sudden fall in the Chinese stock market, after a bubble, ignited concern last year; the fact that the central government
authorities tried to arrest the fall, and failed, turned concern into alarm. Any weakness in China is still reason for concern — so the pain continues this year and has damaged everyone.
It was the Chinese currency
Yes, China can rightly argue that its crude devaluations against the dollar last August and again last month were merely to maintain stability against their global trading partners. But the speed with which reserves are being used, and the eagerness of the Chinese to move their money out of the country, is generating real alarm. A forced Chinese devaluation would be a game-changer.
It was the Fed
This one’s easy. The stellar stock market gains since 2009 has had many investors really worried about when the bubble would burst; and what would happen when the Fed finally raised rates. When it did so, it waited too long, and started to raise rates just as employment gains were fizzling out; and an inventory build-up suggested that the growth cycle in the US was nearing an end. Once the Fed hiked, in December, it’s no wonder that risk assets all over the world reacted badly.
The anemic condition of corporate America’s profitability has been lost in the noise of the last few weeks. At last count, it appears that the S&P 500 companies were on course for a fall of 4.1 % for the fourth quarter of 2015. Following the gloomy forecasts from companies themselves, the current first quarter of 2016 is expected to be just as bad; and estimates for the year are being slashed.
It was negative interest rates
Negative rates from Japan, following the European Central Bank and then followed by Sweden, expose the willingness of central banks to compromise the profits of banks, even though they had never really recovered properly after the crisis, especially in Europe. A rout in bank stocks ensued. That in turn convinced many investors that central banks were therefore out of ammunition — if negative rates cannot work, what else can they do?
It was the US economy
When the year started, much of this bad news I’m speaking about now was already baked into the price of stocks — and, the conventional wisdom was that the US economy was nowhere near a recession… So it followed that this would limit any “downside” slides in the market. The data since then has not exactly been encouraging, challenging the idea that our domestic economy is out of the woods.
It was the bond market
The bond market is sending a classic recession signal, through a flattening of the yield curve — long-term bonds now command a much lower extra yield over short-term bonds than they used to. This has historically been possibly the most reliable indicator of a recession to come, and has added to the alarm bells. In addition, since Dodd – Frank, banks have been pretty conservative with depositors money. While this is good because it makes the banks less risky, it also deprives markets of liquidity… meaning that when selling starts, buyers can be hard to find —resulting in heavy discounts and large losses .
It was irrational exuberance
A key argument for US bulls has been that the long rally since 2009 was always “hated” — few ever trusted it. That implied there was further to go before a true market top. But reliable long-term valuation metrics suggested that the US was hugely overvalued and in the grip of irrational exuberance. Once the market turned it was obvious that few saw anything compellingly cheap and so nobody wanted to buy. (This argument does not, however, apply to Europe or the emerging markets, which entered the last few months looking unambiguously cheap).
It was the short sellers and algorithmic programs
Somewhere, there are short-sellers or doing very well in this market. Add to their numbers, the multitude of computer generated trading programs that exaggerate even the smallest trends, while causing a kind of “lemming” effect with millions of amateur day traders.
It was US Presidential Debate Withdrawal
With all the finger-pointing, and doom and gloom predictions, voters are on suicide watch. Whether it is the threat to install a socialist (Bernie Sanders), or a devotee of the gold standard (Ted Cruz), or a reality show star (Donald Trump) as president in the US… there is no shortage of worry. While this is highly understandable, it is not reassuring for capital markets.
Also, note that I got through the list without mentioning the words “Syria” — arguably the world’s greatest humanitarian and geopolitical crisis in decades — which has overshadowed “Greece,”,last year’s contagion that terrified everyone. Greece’s stock market is the world’s worst performing for the year and Greek issue has not gone away for the euro zone. However, based upon the list of suspects that I have previously mentioned, the tragic situation in these countries has had little to do with the alarm that has gripped world markets in the last six months.