It’s been a disastrous start to 2016 from a markets perspective. The TSX, The Dow Jones Industrial Average, The Nasdaq Composite, Stoxx Europe 600, the Shanghai Composite Index have all entered bear-market territory. These are the facts.
The big question is Why? because from a fundamentals perspective, the sky is far from falling.
Consider this: the U.S. automotive sector has had a record year and General Motors has just upped its forecast for 2016, expecting to sell even more cars. Canadian banks continue to outperform. Yet, rather than looking at these positive economic stories, people are squarely focused on the falling price of oil. The result: fear is driving investor behavior and that’s never a good thing.
A Closer Look At What’s Happening
It’s all part of the cycle of market emotions (see Why is it so hard to buy low, sell high). When the market ascends, it’s easy to think the good times will never end. The same is true when stock prices are falling. When you look at oil prices specifically, they’ve enjoyed a 10-year plus super-cycle of ever-soaring prices, which has been particularly beneficial for oil exporting countries such as Canada. In fact, high oil prices created a tremendous amount of wealth for Canada pushing the value of our dollar up, because Canada is looked at as a petrol currency, even though we have a diversified economy.
With oil below $30 a barrel (as at January 15, 2016), the fear is that oil companies will not be able to meet their debt obligations. Then what? Will there be a massive collapse of debt? That fear spills over to bank stocks because people don’t believe the banks when they state their exposure to the energy sector is roughly 2%. The banks have stress tested the impact of oil at $25 a barrel and they are able to handle it. Even so, investors are selling their bank stocks. And not just the banks. Shares of companies such as Canadian Tire are falling as well. Logically, this doesn’t make sense when you consider that cheaper oil prices mean people have more money to spend on other things. Therefore, retail stocks should be going up not down when oil prices fall
China’s volatility is adding to the negative thinking and fear on the part of investors. The climb in oil prices was largely due to growing demand from emerging economies such as Brazil, India and, especially, China. Consumption of crude oil in China alone doubled over the past decade, according to the Bank of Canada. Now that China’s economy is slowing, that’s further driving down the markets.
Plunging oil prices coupled with slower growth economies in China and globally are the environment investors are navigating and many are opting out. Again, it doesn’t make sense. Low oil prices are good for the manufacturing sector and a low dollar is good for exporters.
Is Emotion Overruling Strong Fundamentals?
Instead, the market is experiencing rapid selloffs similar to what we saw after the financial market meltdown of 2008, which led to the Great Recession. People are equating today’s environment to that of 2008. They are not the same. In 2008, the entire U.S. banking system nearly collapsed, which would in turn have taken down the banking system right across the world. This is nowhere near the case in 2016. Major U.S. financial institutions are reporting solid earnings. The fundamentals are strong but this is all being ignored.
The fear is compounded by the occasional voices of doom and gloom gaining prominent media attention while calling on investors to move to cash.
Even back in 2008, retail investors did not sell everything. Within two years of the market crash, investments were up to pre-recession levels. But it’s the provocative statement that makes the headlines.
Tips For Managing In This Uncertain Environment
Here’s what investors have to remember and do in order to stay calm and carry on:
- Markets go up and markets go down. At the end of the day, what really matters are the fundamentals.
- Look at the diversity of the Canadian economy. It’s far greater than just oil and gas.
- Focus on earnings. Strong earnings equate to strong fundamentals.
- Don’t get bogged down in the price of oil and the Canadian dollar, which is tied to oil. The reality is cheap oil and a low dollar are actually good for many parts of the economy.
- With interest rates at record lows, where are you going to put your money in order for it to grow? If all of your money is in bonds, you aren’t even keeping up with inflation. By making subtle changes and holding on to strong performers, you will be poised to make the most of the markets when they rebound–and they will. Markets are resilient.
- Be a realist and hold your ground. There are still another 11 months left in the year–plenty of time for the markets to bounce back.
Food for thought: Has there ever been a U.S. recession in an environment when unemployment was at 5%, oil prices at record lows, inflation non-existent and governments around the world investing heavily into their economies? To my knowledge never.
Call Me or Email Me
The right financial advisor can provide context and serve as a safety valve when it feels as though the sky is falling. That’s what I try to do with my clients. I help take the emotion out of investing by providing the facts. I welcome you to call me at 416-332-3863 or email me at allan@allansmall.com.