Stuart P. Quint, CFA, Senior Investment Manager & International Strategist
Although we are only nine business days into 2016, markets have gotten off to a rough start. As of January 13, 2016, the S&P 500 was down -7.7% while a moderate-risk benchmark was down -4.2%. In fact, this year has seen the worst start to any calendar year on record.
Unlike past corrections, the catalyst for the recent sell-off in markets is less obvious. One thought is that we are seeing a delayed response to the Federal Reserve’s December rate hike. Markets appear displeased with the timing of the Fed’s action, given the stalling economic growth. In our opinion, the Fed should have considered raising rates a year ago when economic growth was stronger.
Another consideration, it’s conceivable that investors are finally grasping the reality of slower growth in China. This is a factor that we have monitored for quite some time (and a factor in being underweight large emerging markets); but, the timing as to why the markets are worrying about China now is less clear.
There are other factors, too, that might be contributing to the downbeat mood in markets:
- Slowdown in the Chinese economy and continued devaluation of its currency
- Continued weakness and flight of capital in emerging markets
- Weak oil prices (lower capital spend offsetting benefit to consumers)
- Narrow leadership of U.S. equities (e.g. “FANG” stocks driving markets – high valuation, momentum, expectations with little room for disappointment)
- Selloff in high-yield bonds
- Continued deterioration in U.S. and global manufacturing
- Strengthening of U.S. dollar and its corresponding hit to corporate earnings
- Ongoing weakness in corporate revenue growth and economic growth
- 2016 U.S. presidential elections
- Disappointment in global central bank actions (Europe, Japan, China)
While the picture painted above seems saturated in negativity, it’s not all doom and gloom. There are assuredly some more positive factors to consider:
- Global policy remains accommodative, particularly in Europe and Japan
- U.S. interest rates remain low by historic standards
- Job creation in the U.S. remains positive
- U.S. bank lending continues to grow at moderate pace
- U.S. services (majority of U.S. economic activity) continue to show moderate growth
- Looser U.S. fiscal policy should marginally contribute toward GDP growth in 2016 (estimated)
- Economic growth in Europe appears stable, albeit tepid
- Direct impact of emerging market weakness to U.S. economy is less than 5% of GDP
In terms of how we address this in our portfolios, we continue to monitor these conditions and are assessing the risks and opportunities. Within our strategic portfolios, such as our Destinations mutual fund program, we have marginally reduced stated risk within more conservative portfolios while maintaining a slight overweight to risk in more aggressive portfolios. Following the trend of the last several years, we have trimmed exposure to riskier segments, such as credit within fixed income and small cap within equities. Tactical portfolios entered the year with neutral to slightly-positive beta on near-term concerns of high valuations and China.
The S&P 500 has dominated all asset classes in recent years. A potential end to that reign should not cause alarm, but instead refocus attention to the long-term benefits of diversification and why there are reasons to own strategies which do not just act like the S&P 500.
In general, investors should not panic but rather continue to evaluate their risk tolerance and suitability, as well as engage in consistent dialogue with their financial advisors. The turn of the calendar might just be the ideal time to review those needs.
 Theoretical benchmark representing 60% equity (42% Russell 3000 Index, 18% MSCI AC ex-US), and 40% fixed income (38% Barclay Aggregate and 2% T-Bill)
The views expressed are those of Brinker Capital and are not intended as investment advice or recommendation. For informational purposes only. Holdings are subject to change. Brinker Capital, Inc., a Registered Investment Advisor.