A New Day Yesterday


by Jason Norris, CFA Executive Vice President of Research

With U.S. large cap stocks down over 10 percent, it hasn’t been a happy new year for investors. The Fed tried to alleviate fears this week on Capitol Hill by stating that they realize the current volatility may lead to slower economic growth and thus there will be no March rate hike. While the talking heads weren’t impressed with the statement, we believe that it was a positive and highlighted the fact that the Fed is not on a pre-determined path, but rather will remain… data dependent.

There have been a lot of comparisons of 2016 to 2008/2009 and that we are heading into a recession. While the volatility may be similar, we believe the state of the economy is much better than several years ago. The chart below shows the percent of trading days that the S&P 500 was up/down over 1 percent. We chose 1 percent since that is roughly 150-200 points on the Dow Jones Industrial Average and usually grabs headlines.

FactSet Chart
FactSet Chart

In any given year, for 25 percent of the trading days the stocks are up/down at least 1 percent. This year the markets have exhibited record volatility in the first six weeks with over 60 percent of the trading days resulting in a close up/down over 1 percent. This is greater than the volatility we saw in 2008/2009, 2000-2002 and 1987. We believe investors are uneasy about the volatility in part due to the relatively “stable” markets over the past several years. We haven’t seen day-to-day movements in stocks like we have in 2016 since 2011. There may have been a sense of complacency with investors. As we have to remind ourselves: equities are a risk asset.

Our belief is that we are more in line to what we saw in 2011 and not 2008. While there are concerns of a slowdown in global growth, we believe that we are not heading into a recession. Falling oil prices are an oversupply issue and not a demand issue. While China is slowing, the economy is in a transition of moving from infrastructure growth to consumption growth (like every other major developed economy). Finally, the U.S. consumer is in much better health then in 2008. With the unemployment rate under 5 percent, growing wages, and a record number of job openings, we believe the U.S. is far from recession.

One item that has surprised us is the lack of spending. The “new, smarter” consumer isn’t spending all of their paycheck as they have in the past. They are only spending 95 percent of it. This is why we aren’t seeing the robust growth we have historically seen. However, this “smarter” consumer is delivering and improving their personal balance sheets, which in the long run is much better for the U.S. economy. Finally, retail sales data released today showed growth for the fourth straight month in January: 3.4 percent year-over-year. The data also showed consumers starting to spend their gas savings which they’ve been hesitant to do the last twelve months.

Nothing Is Easy

Are we there yet? We don’t know. We do believe that stocks will end the year higher due to the current uncertainty; it’s hard to forecast when the trend turns toward positive. Therefore, for those investors with a long-term outlook, we would be accumulating positions in equities, although we can’t guarantee those positions will be profitable in the next few months.

Finally, these periods of equity market volatility usually don’t last the entire year and we would expect volatility to fall throughout the year as we get more clarity on China growth and continued healthy data from the U.S. economy.

Our Takeaways for the Week

  • The U.S. labor market is healthy and continues to improve
  • While current market volatility is at record highs, long term investors may find some "bargains" when putting cash to work