January Market Update 2016
Market Update: While most people hope to start the new year on a hopeful and positive note, 2016 started quite to the contrary with equity markets taking a significant hit. The falling price of oil, along with economic data out of China confirming slower growth and deteriorating business conditions, were the largest factors contributing to poor market performance, and the worst ever start to a year for US stocks.
We saw the S&P/TSX Composite experience 10 consecutive days of market losses and end the month down 1.2%. Similar declines were experienced globally and across all asset classes. In the US the S&P 500 was down 5.0%, Europe DJ Stoxx -6.3%, Japan Nikkei -8.0%, Oil -8.16%, high yield bonds -1.5% and the CAD/USD 71c.
In China, the sharp depreciation in the yuan currency and selling pressure on stocks has persisted as a result of slowing economic growth. The Chinese stock market continues to decline despite central bank intervention with losses this year of -31.2%.
Adding to concerns about the strength of the world’s second largest economy is the fall in the price of oil. Earlier in the month, the price of oil fell below $30 and analysts expect the price to fall further. Lower oil prices do have some benefits as import and manufacturing costs decline while consumers experience savings at the pumps and lower energy bills. However, the rapid decline in oil prices is cause for concern against the backdrop of a fragile world economy. Oil producing companies and countries are at risk as profits shrink, companies downsize workforces, countries reduce spending and the likely hood for default increases. This risk has spread beyond oil and related industries to other asset classes and across the economy.
In this volatile market, fear runs high and investors become weary and hold back on investments. A recent survey by a large asset manager shows that “cash balances are up to 5.4%, the third-highest reading since 2009” and here in Canada, there is $75 billion on the sidelines waiting out the volatility.
It is important to remember periods of high volatility and market declines are part of regular market cycles – they have happened in the past and will happen in the future.
These are the times when it is most important to maintain a disciplined and diversified investment strategy, to hold steady throughout the market cycles and to avoid panic.
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