The domestic equity markets seemed to be telling investors a story about resiliency in 2015. The S&P finished 2015 flat at -0.7%, but it was anything but a calm year. What is interesting is that even though the S&P 500 was flat for the year, the average stock in the index did considerably worse, returning -3.8%, according to Bespoke Investment Group. Another interesting point is that stocks nicknamed “FANG” (Facebook, Amazon, Netflix and Google), were up over 60% on a cap-weighted basis. If one excluded those four stocks, the S&P was actually down -4.8% last year. One can point to any number of events that proved to be triggers for market sell-offs. Amongst those being, a valuation adjustment of the market due to a slow-down in earnings growth, the Fed normalizing rates (i.e. raising them), the drop in oil due to the over-supply by the Saudis, and the Chinese devaluing of their currency. All of these indicate that, while we are on the longest expansion (entering year six), we have entered the stage where more volatility is happening with more regularity.
The current correction began the first of the year and is very similar to last August’s with a swift price decline and most probably due to the devaluing of the Chinese currency. While there are concerns, and some are professing a recession is around the corner, the evidence is not there. The larger services segment of the economy is showing very-sustained growth. Another point is, if a recession is coming it would not be brought on by a crash in oil prices. More often than not, it would be a surge in oil prices that would help trigger a recession.
“What we are facing now is an environment where the headwinds associated with weak oil have a higher miles-per-hour than the tailwinds, which have yet to pick up.” Oil prices likely have to stabilize for the market to do the same. (I might add that during the earnings season all company buybacks are suspended, thereby removing the potential floors for equity prices in the short term.) In addition to the stability in oil prices, we think that the Fed will have to postpone its rate hikes thereby providing more certainty for the markets.
It should be noted that years following flat years (the market has been flat six years since the end of World War II) that each year following the flat year the market was positive by double-digits. If earnings, without the negative effects of a reclining energy price and a strong dollar, can rebound, the market could very well end up on a positive note.
We should remember the words of John Templeton, “Bull markets are born on pessimism, grow on skepticism, mature on optimism, and die on euphoria.” We are probably somewhere between skepticism and optimism and, in our minds, the bull market continues after this correction.
Some information provided by: Raymond James Financial and Liz Ann Sonders of Charles Schwab