An Update on Recent Events in the Global Market
Global stock markets are continuing to decline with the S&P 500 down .74% yesterday morning , -3.33% year-to-date (YTD), and the MSCI World Index ex USA down 1.11% and -3.86% YTD. Volatility measures for financial assets are also rising significantly. There are several causes for the decline:
Oil Prices: Oil prices continue to decline, which negatively impacts energy stocks. The decline in commodity prices is also an early warning sign of decreased manufacturing activity. Energy and commodity price weakness can impact a number of business sectors from steel to heavy equipment and all sectors are feeling the negative impact of lower prices and demand.
Geopolitics: The North Korean nuclear test, ISIS, the dispute between Saudi Arabia and Iran, and the European immigration problem are all negatively impacting stock prices. In addition, cyber terrorism continues to become a real threat.
Slowing Global Economic Growth: The recession in Japan and continued slow growth in the Eurozone are instilling fears that global growth will fall and spillover into the US economy.
China: China devalued the Yuan for a second time this week as growth slows as a result of its transition from a manufacturing to a consumer-driven economy. The Chinese stock market declined 7% yesterday before the government implemented a trading suspension for the day and the Shanghai Composite is down roughly 15% from its December high.
Uncertainty: Markets hate uncertainty, and there is a lot of it right now. How much, how long, and when will the Federal Reserve increase interest rates again? What will happen with US elections this year? Will the United States experience another recession? Markets move on uncertainty in the short-term, but they focus on fundamentals in the long-term.
Fortunately, however, there are some positives!
US Economy: We do not believe the United States will fall into a recession in 2016. Recent economic activity continues to be positive on the services and employment front. This is fueling an increase in consumer spending which is up 3.2% year over year. Consumer goods and services represent the majority of our economy and are a good indicator of future economic growth.
Capital: Capital continues to flow into the United States because of the stability of our economy and political system. This should provide support for stock prices. The low level of global interest rates makes the United States markets one of the more attractive investment alternatives.
Stock Prices: Stock prices, while expensive, are still trading within a normal valuation range. The forward PE ratio on the S&P 500 is at 23 times earnings as of Dec. 31st and the norm is something close to 17.5 times earnings. The higher multiple can, at least partially, be justified by our very low interest rates.
Portfolio Diversification: Diversification provides a safety net to portfolios during periods of uncertainty and increased stock market volatility. Nearly all of our clients’ accounts are committed to fixed income in order to provide a cushion to portfolios during these periods of stock market volatility.
Security Selection: Our security selection process continues to concentrate on high quality, dividend-paying stocks, with conservative financials. These companies provide protection in volatile stock markets because of their consistently strong sales and earnings and stable dividend yield.
If you have any questions or would like additional insight on any of the above points or would like more information about the Wealth Management Group at Stock Yards Bank & Trust Company, please call us at (502) 625-1605.