During the first 4 trading sessions of the New Year, the markets have been barraged with unexpected and troubling news.
China, oil, and Middle Eastern tensions have dominated investor psychology prompting significant sell-offs in the markets.
The People’s Bank of China (PBOC) has been trying unsuccessfully to defend the yuan, prompting some to call for a sharper depreciation. This downward pressure on interest rates would relieve the debt servicing burden on Chinese businesses. Additionally, the China Securities Regulatory Commission had to initiate, and then suspend, its circuit breaker system after Chinese shares’ precipitous decline.
Who would have thought that oil would continue its downward spiral and trade around $33.25 a barrel? Consider that the two fastest growing economies in the world (China and India) need less and U.S. stockpiles have swollen to record levels. Traders are responding by saying, “Why not?”
Finally, the news about recent developments between Iran and Saudi Arabia are troublesome. As reported by the Brookings Institute, “The problem is that the context has changed dramatically. Today there are all-out civil wars burning in Iraq, Syria, Yemen, and Libya, and would-be civil wars simmering in Egypt, Turkey, Mali, Somalia, and South Sudan. Bahrain, Lebanon, Jordan, and Tunisia all face dangerous internal discord. Iran and Saudi Arabia now lead rival coalitions waging proxy wars—figuratively across the region, and literally across Syria, Yemen, and (to a lesser extent) Iraq.”
All this begins to explain why the markets are down. Currently the S&P 500 has fallen by 3.3% and the MSCI ACWI (global stock market) is down 5.4% since the beginning of the year. Our domestic markets can now be labeled as being in a “correction.”
As we have mentioned in previous commentaries, volatility is increasing. To be fair, we did not expect this much volatility in such a short period of time. We currently believe that while investor psychology remains fragile, the overall trend of global economic activity is still positive. Yes—there are new geopolitical risks, oil prices to work thru the system and the Chinese exchange rate creates structural trade challenges. However, while we might be reducing our positive outlook and asset allocation as it pertains to Emerging Markets, we are currently maintaining our portfolio structures. Short term sell-offs can present long-term buying opportunities.
As always, we appreciate your trust in us and encourage you to call your Advisor should you want to discuss this further. We remain committed to keeping you informed.