Market Fears Accelerate
February 11, 2016
Investors are beginning to panic. Today’s slide in stocks brought the S&P 500 through its January 20th intraday low of 1812 to a fresh two-year low before rebounding late in the day. That’s a 15 percent decline from the market highs we saw in May of 2015 and an 11 percent decline YTD.
We are clearly in the midst of a global growth scare but is the current selling justified? Is the global economy truly imploding, or are investors becoming overly negative as market selling feeds on itself? To answer those questions, we feel we need to weigh the economy versus the market.
There’s little question that we are experiencing some degree of slowing global growth rates precipitated by China’s economic transition and the weakness in other emerging economies tied to commodities and China trade.
The IMF pared its growth estimates in its January World Economic Outlook (WEO) from its expectations back in October 2015. However, the numbers still indicate a positive growth scenario, at 3.1 percent in 2015, 3.4 percent in 2016, and 3.6 percent in 2017.
Their projected pickup in growth in the next two years reflects forecasts of gradual improvement of the growth rate of some of the world’s most distressed economies, like Brazil, Russia, and some Middle East countries. So their numbers, in their own words, could be frustrated by new economic or political shocks. However, a derailing of global growth is certainly not the expected outcome.
Here at home, things may not be robust, but they’re also not that bad. We’re heavily dependent on the consumer given that capital spending is being negatively impacted by the energy and materials sectors and that government spending is flat. But the consumer, at this point, is alive and well. Employment and wages are solid, and consumer confidence has been holding at high levels. Lower oil prices, though weighing on the stock market, are putting extra money into consumer’s pockets. We have to see how readily consumers spend the added disposable income, but gas pump savings have accelerated in late 2015 and early 2016, leading us to believe we’re going to see some follow through on spending.
The consumer is such a critical component of the U.S. economy that we’re not willing to submit to the negative psychology of the moment and jump on the doom and gloom, recessionary bandwagon. We see it as a disconnect between the market and the fundamentals.
We believe that based on current 2016 earnings estimates for the S&P 500, which we carry at $117-$118, a fair valuation today on the market is closer to 2000. It’s challenging to maintain a cool head and longer-term perspective in the face of this year’s market sentiment and volatility. We can only encourage you to distinguish between negative sentiment and the true fundamentals. We came into this year feeling that market risk had risen as we expressed in our 2016 Outlook. However, we feel that the sell-off that we’ve experienced since the outset of the year has discounted much of that risk.
Chief Investment Officer
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