Think markets have calmed? As BlackRock’s Heidi Richardson suggests, the stage is still set for more volatility, and there are steps investors can take to prepare for it.
Although markets have been relatively stable the last couple of weeks, that doesn’t necessarily mean the turbulence we’ve seen this year is behind us. After all, the catalysts for the volatility we saw in January and February are still here: excess supply putting pressure on oil prices, disappointing earnings, and slowing global growth. Add to this a highly unusual election season in the U.S. and uncertainty surrounding China and the stage is set for volatility to remain with us in 2016.
Market Realist – Volatility to continue
Global equity markets (EFA) (IEFA) have remained relatively calm in the past few weeks after a bout of intense volatility affected markets during the last few months. A sharp fall in stocks was initially triggered by fears of a hard landing in China (MCHI), the world’s second-largest economy. But the collapse in oil (IEO) (IEZ) prices really led to the sell-off in January and February. Declining oil prices can be a sign that global economic growth is slowing down.
Additionally, the selling frenzy was also due to disappointing earnings by many companies. According to the S&P Dow Jones Indices estimates, GAAP earnings for companies in the S&P 500 declined by 12.7% in 2015 over the previous year. Factset estimates the earnings to decline further by 8.3% in 1Q16. Three months ago, analysts forecasted 1.6% earnings growth for S&P 500 companies. Factset data further show that 91 companies have issued negative EPS (earnings per share) guidance for 1Q16 while 26 companies have issued positive guidance. Weak corporate earnings growth will increasingly become a major contributor to market volatility as we move in 2016.
China’s economic pessimism
Chinese exports declined 25.4% in February year-over-year while production rose by just 5.4% in January and February, the worst since 2008. The weak showing by the Chinese economy prompted concerns over the global recovery, which could also contribute to market volatility.
In the rest of this series, we’ll discuss the strategies that investors can follow to deal with the volatility.