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What’s up with the Stock Market?

January proved to be a difficult month for stocks. As a matter of fact, the first ten trading days of 2016 were the worst ever recorded to start a new year. Adding salt to the wound, the S&P 500 just corrected for the second time in five months, which is a decline in price of 10% or more from its most recent high.

 

Bull markets do end, and the current one is nearly seven years old, the third longest in history. But if a bear market is truly on the horizon, it may not last very long. Historically the stock market has gone up in value far more than it has gone down. As for the so called “January Effect”, the markets performance the first month of the year has no bearing on its direction for the rest of the year. It was only two short years ago, in 2014, when a negative January lead to a gain in the S&P 500 of over 15% between February and December.

How far would stocks have to fall to be in a bear market? If the S&P 500 closes below 1,708 we would have a “technical” bear market for the index – a 20% fall from its most recent peak. Right now, the S&P is above 1,850. While the S&P 500, Dow Jones Industrial Average, and Nasdaq Composite have all corrected in January, the damage to small-cap and mid-cap stocks has been worse. The Russell 2000 is in a bear market along with several other world indexes.

Where is the bottom? We may or may not be there just yet and we expect to see continued volatility in the short term. For the market to stabilize and eventually rebound, investors must accept two realities that have been hard to stomach…

Oil prices could remain under $50 this year. Recent consensus by 12 Investment Banks is that oil will average about $50 per barrel in 2016. Unfortunately, oil price forecasts frequently miss the mark, and if the oil glut persists, prices may take months to regain those levels. For most of January, oil traded in the low $30 range and both Saudi Arabia and Russia are not cutting back output. With embargoes being lifted, Iran is also set to export more oil and U.S. daily oil output has only fallen by about 500,000 barrels since April of last year.

China may never grow like it once did. Its leaders are overseeing a gradual shift from a manufacturing-centered economy to one built on services and personal consumption expenditures. The nation’s growth rate has fluctuated since 1980, but for most of that time it has topped 8%. For a long time, observers have questioned the numbers coming out of China, but with a population more than three times the size of the entire United States, even in a slow down their growth is remarkable. The International Monetary Fund forecasts China’s growth in the 6% range over the next couple of years and markets have reacted swiftly to the potential sputtering of China’s economic engine.

A strong dollar, the slumping commodities sector, and the pullback in U.S. stocks have all hurt recent expectations. However, there are several things that could kick start the markets this year; OPEC could cut oil output, Chinese indicators could beat forecasts, and corporate earnings could surprise to the upside. It’s also probable that central banks will take further action this year. China’s leaders have already intervened in their stock market and may authorize additional stimulus. The European Central Bank stands ready to increase the scope of its bond buying, and we believe the Federal Reserve will hold off on tightening for at least the first half of the year.

Big picture, while we may be seeing signs of slowing in the short term, it’s clear that the global economy is still growing. The recent volatility in the markets is nothing new, and for some investors has presented an opportunity to purchase assets at a much lower price than just a month ago. While times like these cause short term jitters, it’s the long term thinker that prevails. The investors that will do best are those that don’t fall prey to emotion.

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About Stephen Rischall

Stephen is an award winning fiduciary financial advisor. He began learning to invest at the age of 13 and helped manage the University Corporation Student Investment Fund while studying finance in college. Stephen has been featured as the financial expert for millennials on live radio and in the news. He is an avid adventurer and is passionate about helping people make smarter financial decisions.
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