J. Saunders Wiggins, CFP®, AIF® CEO/President
It seems as if the stock market ate at Chipotle and caught a norovirus to start 2016. December sales at Chipotle decreased around 30%, which is hopefully not what will happen to the stock market. But investors should be cautious and aware of the many influences that are causing concerns for Wall Street. For several quarters, we have been discussing the persistent issues in China and the Eurozone and how that may affect our domestic economy.
China was rolling at the beginning of 2015 only to see its fortunes turn during the summer. Concerns about growth, the government’s ability to change the economy from exports to consumption, and currency manipulation have not gone away. While the change from exports to consumption will take time and have its associated pains, the bigger issue will be the government’s ability to control the currency. The volatility has caused foreign currency reserves to decrease at a very quick pace. Further, the credit bubble that fueled much of China’s growth is starting to lose air. The question, then, becomes what you should do about your investments in the Chinese market. The simple answer is nothing since your stake in Chinese stocks through a mutual fund or ETF is probably very small. Almost all of Chinese stocks are owned by Chinese nationals rather than foreigners or institutional money managers.
We’re seeing mixed signals in the Eurozone. While the European Central Bank (ECB) will try to keep the markets propped up, there continue to be issues. It seems Europe has fixed its sovereign debt crisis, so what are the latest problems? One of them may be the fact that exports as a percentage of GDP are rather high compared to the United States. As China is struggling, so is Europe to some extent.
In the U.S., we’ve seen oil prices decrease significantly over the past year, around 50%. While this has been good for families, it hasn’t been so great for the stock market. Even though the energy sector is only about 6% of the S&P 500, a 50% decline in oil prices has a significant impact on S&P 500 earnings and the index’s ability to go higher. The Federal Reserve raised its benchmark interest rate by 0.25%, which is rather insignificant. However, the expectation that there will be another percentage point increase throughout 2016 is spooking some investors. Given the current state of the economy and global events, it will be difficult for the Fed to do so. But the Fed does need room to maneuver in case of a recession and is perhaps looking to create it through interest rates.
Speaking of a recession, the term industrial recession has been thrown around a lot lately. Market observers point to a number of statistics signaling that in addition to the energy sector, transports and manufacturing are in a recession. This doesn’t make for a good investment outlook and has many investors concerned. Of course, this industrial recession can be directly linked to the low demand in Europe, China and elsewhere in the world.
Given all of the recent market volatility, what should investors be doing? Here are ACG’s top 5 considerations:
- Stay invested: the best days in the market occur within a short time period after the worst days.
- Review your asset allocation: make sure you understand the risks your portfolio has and determine if they are appropriate risks.
- Tax loss harvest: it’s never too early.
- Dollar cost average: if you have some extra cash, or are a 401(k) participant, this is a great time to make contributions and buy investments.
- Focus on long-term goals: the markets go up and down over short periods of time. If you’re invested for the short term, then refer back to number two on this list.
And for a little bit of personal finance fun, if you’re playing the lottery and win, don’t do what these 21 lottery winners did.