Description
January 7, 2016
A volatile open to 2016 provides little insight into what the year may bring
Global equity markets traded
lower yesterday on news that
North Korea conducted a nuclear
test Tuesday evening. While this is
not the first time that the North
Korean regime has surprised the
world with such a move, its claim
that this was a successful test of a
hydrogen bomb, if true, would be a
meaningful development for its
nuclear program and the security
of the region. However, there is
evidence that the explosion was
consistent with a less powerful
atomic weapon similar to those
tested in the past and that the
North Koreans may be
exaggerating its capabilities.
Equity markets had already been
volatile in recent days, and this
development put further pressure
on equities. Asian markets fell
about 1% on the news, while
European stocks followed suit.
Major U.S.
equity indexes were also down by more than 1%, having already dipped moderately in the first few trading days of the year. Bonds held firm, with the 10year Treasury yield edging below 2.2%, while oil continued its recent slide. It’s important to note that geopolitical developments such as this typically have an immediate, but limited, negative impact on market sentiment, but seldom have a lasting effect. We anticipate that the reaction to this news will follow a similar pattern, and markets will turn their collective attention to any number of other matters in short order. We’re already seeing evidence of that today, as a sharp selloff in Chinese equities overnight led to a full-day halt on trading.
Equity markets elsewhere in Asia and Europe followed suit, and U.S. equity markets opened lower as well. It’s clear that global equity markets are responding to the daily flow of news—positive or negative. While trading in recent days has been to the downside, there are some potentially positive catalysts on the horizon. The December employment report that will be released this Friday has the potential to move markets.
In addition, corporate earnings season is upon us. With earnings expectations relatively low, even moderately positive results could act as a positive catalyst for equity markets in the coming weeks. More broadly, the U.S. economy continues to grow, job creation and consumer sentiment remain positive, and inflation and interest rates remain low.
Even with the Fed’s recent decision to raise the funds rate by 0.25%, monetary policy still remains very accommodative. Moreover, U.S. equity markets generally move higher in the year following the start of a Fed rate hike cycle, with even stronger results when the Fed takes a gradual approach to raising rates. The Fed’s projected policy path fits the bill, and monetary policy appears likely to be very accommodative for some time to come. While the market may have lost some ground to start the year, it’s important to note that from a historical perspective, the performance of stocks at the beginning of the year provides no indication of how they will perform in the coming quarters.
Since 1950, the S&P 500 has lost ground in the first week of the year about 45% of the time. Over that same period, January returns for the index were negative about 40% of the time. Even in those years in which the S&P was down for either the first week or the first month, the index still posted positive calendar returns about half the time.
Put simply: investors shouldn’t assume that a few down days for equities to start the year are a sign of things to come. Volatility may create opportunities to rebalance one’s portfolio or put cash to work, but shouldn’t deter long-term investors from remaining firmly committed to their plan. . 2 BLOG For other up-to-date economic perspectives, visit PMFA’s Market Perspective’s Blog at market-perspectivesblog.pmfa.com. Plante Moran Financial Advisors (PMFA) publishes this update to convey general information about market conditions and not for the purpose of providing investment advice. You should consult a representative from PMFA for investment advice regarding your own situation. The information provided in this update is based on information believed to be reliable at the time it was issued. Any analysis non-factual in nature constitutes only current opinions, which are subject to change. .
equity indexes were also down by more than 1%, having already dipped moderately in the first few trading days of the year. Bonds held firm, with the 10year Treasury yield edging below 2.2%, while oil continued its recent slide. It’s important to note that geopolitical developments such as this typically have an immediate, but limited, negative impact on market sentiment, but seldom have a lasting effect. We anticipate that the reaction to this news will follow a similar pattern, and markets will turn their collective attention to any number of other matters in short order. We’re already seeing evidence of that today, as a sharp selloff in Chinese equities overnight led to a full-day halt on trading.
Equity markets elsewhere in Asia and Europe followed suit, and U.S. equity markets opened lower as well. It’s clear that global equity markets are responding to the daily flow of news—positive or negative. While trading in recent days has been to the downside, there are some potentially positive catalysts on the horizon. The December employment report that will be released this Friday has the potential to move markets.
In addition, corporate earnings season is upon us. With earnings expectations relatively low, even moderately positive results could act as a positive catalyst for equity markets in the coming weeks. More broadly, the U.S. economy continues to grow, job creation and consumer sentiment remain positive, and inflation and interest rates remain low.
Even with the Fed’s recent decision to raise the funds rate by 0.25%, monetary policy still remains very accommodative. Moreover, U.S. equity markets generally move higher in the year following the start of a Fed rate hike cycle, with even stronger results when the Fed takes a gradual approach to raising rates. The Fed’s projected policy path fits the bill, and monetary policy appears likely to be very accommodative for some time to come. While the market may have lost some ground to start the year, it’s important to note that from a historical perspective, the performance of stocks at the beginning of the year provides no indication of how they will perform in the coming quarters.
Since 1950, the S&P 500 has lost ground in the first week of the year about 45% of the time. Over that same period, January returns for the index were negative about 40% of the time. Even in those years in which the S&P was down for either the first week or the first month, the index still posted positive calendar returns about half the time.
Put simply: investors shouldn’t assume that a few down days for equities to start the year are a sign of things to come. Volatility may create opportunities to rebalance one’s portfolio or put cash to work, but shouldn’t deter long-term investors from remaining firmly committed to their plan. . 2 BLOG For other up-to-date economic perspectives, visit PMFA’s Market Perspective’s Blog at market-perspectivesblog.pmfa.com. Plante Moran Financial Advisors (PMFA) publishes this update to convey general information about market conditions and not for the purpose of providing investment advice. You should consult a representative from PMFA for investment advice regarding your own situation. The information provided in this update is based on information believed to be reliable at the time it was issued. Any analysis non-factual in nature constitutes only current opinions, which are subject to change. .
