Equities are having one of their worst Januarys in history. There are a number of factors contributing to this increased market volatility, including:
- Steep declines in commodity prices, which are causing an increase in credit defaults and are having a negative impact on commodity-exporting emerging markets economies
- Slowing economic growth in China and a devaluation of the yuan currency, which negatively impacts profits for companies selling to China
- A strong US dollar, which is negatively impacting US exports in sectors such as industrials
- Institutional uncertainty in Europe, with a referendum in the UK about staying in the European Union and a large refugee crisis
- Multiple geopolitical threats
In addition, the market was long overdue for a correction, as the current bull market is the longest on record.
The Longer-Term View
On the other hand, we believe there are some offsetting positives:
- Valuations are reasonable. This is not a repeat of 2000, when valuations reached absurd levels.
- Consumers in most economies will benefit from lower commodity prices and are not as leveraged as in 2008.
Though the correction may continue, we believe forecasting market behavior over short time periods is impossible, and that the best course of action is to use corrections as an opportunity to add to investments that have a proven record of being able to deliver strong risk-adjusted returns.
With respect to 2016, we are still forecasting 2.0-2.5% economic growth and moderately better US corporate earnings, excluding the energy sector. Secular growth drivers in health care and technology should continue to benefit companies that are able to innovate. While a financial crisis brought about by a continued decline in commodity prices is possible, we think the probability of this occurring is low. Despite increased volatility this year, we expect equities to trend higher.
 Second only to 2009. Source: Morningstar as of 1/25/16.