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News, research and market insights from our team of experts.
January 13, 2016
The first week of 2016 is already one for the record books - the Dow and the S&P 500 have delivered the worst ever beginning to a year. The focus of the turmoil in US and global markets is China, where trading on the onshore stock exchange was halted twice last week amid panic selling. The Shanghai Stock Exchange Composite Index ended the week down nearly 12% from its year-end level.
This is in some respects a repeat of what we experienced in the summer - a total breakdown in the Chinese onshore market sparking anxiety elsewhere. This time it has been made worse by the inept implementation of circuit breakers on the Shanghai Stock Exchange that were implemented after the summer sell-off. The circuit breakers were intended to dampen panic selling. Instead, they have amplified it, because fearing that trading will be halted, investors have been racing for the exits whenever they have a chance. The circuit breakers have now been suspended, and Xiao Gang, China's top securities regulator, was summoned to testify to China's cabinet on Thursday.
As we considered the events of last summer and examined the Chinese government's heavy-handed intervention, we recognized that the probability of an event like this was heightened, which contributed to why we recommended exiting broad emerging markets stocks and Asian bonds over the summer. Our clients' portfolios have very little direct exposure to the events in Shanghai.
That's cold comfort when markets elsewhere are falling too. There are worries that weak Chinese economic statistics, a falling currency and China's market performance are signaling a slowdown in global growth. This may indeed be the case, but the likelihood of the global economy tipping back into recession in the near future appears low. The United States ended the year with an unemployment rate of 5%, and the strongest wage growth we've seen in the last six years. Monetary policy in Europe and Japan remains extraordinarily stimulative. And there are even positive developments in China, where upcoming economic data is likely to confirm that 2015 was the second year in a row that the size of the service and consumption sectors exceeded the industrial sector.
It's important to remember that what we're seeing now is in some ways normal for stock markets. The last six years have been unusually placid. But the low volatility of the last few years is in fact an aberration - history tells us that stock market investing should involve more bumps than we've had lately.
High equity valuations warrant caution, and we have positioned portfolios accordingly. However, the dislocations of the last few days - and the last year - may actually be creating opportunities. More than a third of the stocks in the S&P 500 are already 20% or more below their 2015 highs, and there are likely some bargains among them. High yield bonds are also beginning to look attractive, though the opportunity may not yet be ripe. It's natural to be anxious about the market's swoons, but this week's volatility is not a reason to deviate from a disciplined approach.
The above commentary represent the opinions of the authors as of 1.11.16 and are subject to change at any time due to market or economic conditions or other factors.Print