The Market: January 2016

As I write, I am awaiting the December Jobs Report. The news release has a greater interest in light of the stock market having the worst start to a year on record.

The S&P500 has fallen about 5% in the four trading days of 2016.

Weak economic data out of China and the sharp decline in Chinese stocks has created a greater fear of global recession. The Chinese also lowered their currency exchange rate with the US dollar.

Of course, the decline has brought out the “bears”, many of whom are calling for steep declines in US stock markets and a US economic recession.

Strong December Jobs Market

Ok – the jobs number is out and it is a strong employment figure.

In December 292,000 Americans found work, many more than the estimate of 200,000. Plus, more people moved into the job market and the prior two months were revised upward.

I’m not sure how the US goes into recession when jobs are being created at such a strong pace. There are certainly a lot of negative pressures bearing down on the US economy and stock market.

Falling commodity prices create worries about bankruptcies and defaults on the part of companies and countries that are dependent on these commodities.

The strong dollar is crimping the competitiveness of US companies that export goods and services abroad.

Thirdly, a slowdown in China puts into question the global demand for goods, commodities, and the internal ability of China to adjust its economy.

Doomsday Scenario or Steady Stream of Decent Economic Numbers?

By combining these negatives, one can easily put together a doomsday scenario. Not all the news is bad.

As we saw today, the US economy may not be going gangbusters but it is nevertheless moving along.

There has been a steady stream of decent economic numbers out of Europe. Again not fantastic but not bad.

India seems to be back on a growth path.

China has been long described as an enigma. It is difficult to know how their transition from a capital intensive growth model to a consumption economy will develop. The Chinese government has many levers to pull and while it may be bumpy, it is too early to know how it will turn out.

Much has been made of China’s currency devaluation. Remember, China pegs the Yuan to the US dollar and the dollar appreciated something like 20% over the past year. The US is not China’s only trading partner.

While trade with the US amounts to about $500 billion, China’s trade with its neighbors – Japan, South Korea, Taiwan, and Russia is a combined $872 billion. It is understandable that China would want to lower its exchange rate to compete with the rest of the world.

While the news flow now is unsettling, beginning-of-the-year predictions seldom come to be. A lot can happen in a year.

There is a tendency to want to extrapolate the most recent data into the future. Just because 2015 was flat to down, many pundits are declaring 2016 will be flat to down as well.

Bull markets end when there is euphoria and everyone is excited to be in stocks.

— Ian Green, Pendragon Capital Management

Subscribe to Pendragon's Newsletter

Note: This blog article is intended for general informational purposes only. Nothing in it should be construed as, and may not be used in connection with, an offer to sell, or a solicitation of an offer to buy or hold, an interest in any security or investment product.