Friday’s global market drop looks to be an extension of the stock market weakness we have seen since 2016 began. We believe, at its core, this weakness is a reprise of the weakness we saw last August and we expect much the same result. Specifically, modestly weaker-than-expected Chinese economic data along with another devaluation of the yuan seems to have many investors increasing the probability of a global recession sparked by a significant unexpected drop in Chinese economic growth. We continue to believe that China will do what is necessary to deliver a growth rate for 2016 that is very close to its growth target of 6.5%. We also expect increasing volatility from quarter-to-quarter in the Chinese economic growth rate as China transitions from an investment-led economy to a consumption-led economy.
Because we do not believe that a U.S. recession is likely this year, we view this sell-off as a temporary correction rather than the end of the almost seven-year U.S. bull market. In fact, on Thursday our global team of investment strategists went from “neutral” on equities to an “overweight” call based on sentiment measures which indicated that the U.S. equity market had become “oversold” at the previous day’s closing value of 1890 on the S&P 500® Index.
Specifically, today’s market furor seems to have been started by weak U.S. consumer spending in the month of December and yet another leg down in oil. Today’s oil weakness is likely a result of economic growth concerns in conjunction with the expectation that the International Atomic Energy Agency will issue a report stating that Iran is complying with the agreement to control its nuclear program. There is anticipation that as a result of this, sanctions may be removed, which may further exacerbate the oil market’s current oversupply problem. And in a perfect market storm of negativity, both Citigroup and Wells Fargo announced lifting loss reserves in response to potential defaults by oil companies.
All said, we expect the global market to recover from these lows as market fears of an impending global recession fade, much like we saw following the weakness in August. In any case, we expect modest positive equity returns globally for 2016
with higher levels of market volatility. In short, expect 2016 to be a grind. It certainly has started out that way.