There is no doubt in our minds that 2016 has brought volatility to the equity markets. But should we all panic? We don't think so, and here's why.
- First, there is no clear sign of a recession in the US at this time. We believe that the recession risk has increased, but it is not imminent. To date, we have not had 1 quarter of contraction, much less 2, which is the actual definition of a recession. Much of the economic data even points away from a recession. Personal income is up, and more people are working than last year. Sales at bars and restaurants grew 8.1% in 2015, which is not something you would typically see in a recession. I remember in 2008 when you couldn’t find anyone eating at a restaurant, which is more typical of a recession than what we are seeing today.
- All the news that is driving the markets is old news:
- China slowing down – this is really old news. This became clear back in August, when their markets crashed and they devalued their currency. It is also something that had to happen, as a large part of their growth was attributed to people moving from the farms to the factories. Besides, a 10% growth rate is unsustainable, and they had been on a 30 year run at that level.
- Oil has been on a steady decline for 2 years, this isn’t a new phenomenon. Supply outpaced demand, and now everyone benefits in the short term from low gas prices. Only investors don’t benefit.
- The FED had been discussing a rate hike for almost a year, and finally pulled the trigger in December. If this hadn't been priced in to the value of equities during that time, the market wasn't doing its job.
- Earnings season is here, and the expectations of analysts have been lowered to a point that companies almost have to beat their earnings targets. This isn’t exactly great news, but it should provide a small boost for the market.
- Oil could hit $40 by mid-year according to Goldman Sachs. This is obviously just a guess, but for every $10 prediction, there is also a $60 dollar prediction. Oil production in the US is down 150,000 barrels per day right now, and falling. The trend over the last week has been largely positive for oil.
- Stocks are oversold, not over-valued. A few months ago, stocks were trading at very high P-E ratios, now that is not the case. Many of the talking heads are now labeling this a buying opportunity.
- Retail sales declined 0.1% in December, but still grew in 2015 by 2.1%.
- Much of this can be explained by lower gasoline prices.
- Discretionary items like automobiles increased sales substantially in 2015
- The VIX isn’t spiking, and neither is gold. At the time I was writing this, the VIX stood at 20.51, clearly not a reading that indicates that people are selling “no matter what the price”. Gold closed last week at $1098.2, which was up, but not a substantial increase. Hardly a “flight to safety” you would expect to see in an economic collapse.
- I found a list of the retail chains that are closing the most stores. They are Staples, Sears, Radio Shack, Office Depot, Macy’s, JC Penney’s, Family Dollar, Barnes & Noble, Aeropostle, and Abercrombie & Fitch. I would argue that none of this has much to do with the economy. If you look down that list, you will see a list of retailers that fall in 3 categories:
- Retailers that have been out of business for years and just haven’t realized it (Sears, JC Penney, Radio Shack)
- Retailers that have been replaced by Amazon (Barnes & Noble, Office Depot, and Staples)
- Retailers that used to be popular with tweens who are now in their 20’s (Abercrombie & Fitch and Aeropostle)
- The one outlier is Family Dollar, which is closing ecause they were acquired by Dollar Tree
- Acording to Ned Davis Research, there have been 35 bear markets since 1900, and the average length of them is 403 days. This current decline started on June 23rd, 2015. If we were in a bear market, we would be over halfway through it, according to Mark Hulbert.
Lastly, you should never panic if you are a long-term investor. In fact, you should celebrate every correction and bear market. Would you rather pay MSRP, or get the employee discount when you buy a car? It is no different in the stock market. The shares of almost any equity that you bought in 2009 gained way more by 2015 than the shares you bought in 2007, right?