As we saw at the close of last week’s market and really all of the first half of January, 2016 has had a difficult beginning. There are a number of market concerns that have resulted in a correction in the first half of January and they revolve around:
– The economic slowdown in China and the devaluation of the Chinese currency.
– A significant drop in the price of oil (approaching $30 per barrel) and the resulting drop in the price of energy stocks.
Although we hate to see a year begin with a market correction, 10 percent to 20 percent market corrections are normal, and I don’t believe this one is exceptionally unusual. In addition, I don’t believe the market correction is indicating or will lead to a recession in the U.S. in 2016.
Let’s look at the current market concerns and consider the logic. Although China is the third largest U.S. export nation after Canada and Mexico, it’s important to remember that consumer spending represents 70 percent of U.S. GDP (economic growth) and exports represent only a tiny fraction of our economic activity. Therefore, the slowdown in exports to China, because of a slowdown in China’s economic growth, isn’t a significant factor in U.S. economic growth and certainly wouldn’t cause a recession. As a matter of fact, China is trying to move towards a consumer-driven economy, and over the long term, this will be good for U.S. exports.
The drop in oil prices, although difficult for the oil companies, is positive for the U.S. economy in the long run. Despite this, the negative effects of falling oil prices impact the economy immediately. Again, considering consumer spending represents 70 percent of U.S. GDP, a significant drop in gas and oil prices literally puts money in the consumer’s pocket which, over time, leads to an increase in consumer spending.
It’s very difficult to see a scenario of economic recession in the U.S. when interest rates are so low and the Federal Reserve has been so accommodative. Even if the Federal Reserve raises interest rates by 1 percent in 2016, on a relative basis, rates would still be considered low. With an increase in housing and auto sales, unemployment trending lower, falling gas and oil prices, along with the continued growth in corporate earnings, it is reasonable to expect the economy and U.S. equities to do well in 2016.
Therefore, unless your investment objectives have changed for some reason, we would recommend you maintain your current asset allocation. If you are under-allocated to U.S. equities, this would appear to be an opportunity to increase that allocation. If you are fully allocated, we recommend staying the course through this correction and look forward to recovery and further growth in the stock market later in 2016.