- After limping to a disappointing close for 2015, stocks around the globe have sold off sharply as a return of an economic “hard landing” in China dominate the macro narrative.
- Weak manufacturing data revived fresh concerns about China’s slowing economy. Meanwhile, Beijing’s latest move of devaluing the yuan against the U.S. dollar roiled global markets, reviving fresh accusations of currency manipulation and sparking fears of a currency war. In the Shanghai stock market, a poorly implemented circuit breaker system – which led to two stock market trading halts in four days – was suspended less than a week after it was introduced.
- Further exacerbating world tensions, Saudi Arabia cut off diplomatic relations with its principal rival Iran, and North Korea claimed to have successfully carried out a hydrogen bomb test.
- The US economy remains a relative bright spot. Approximately 70% of US GDP is driven by consumption. Jobs growth continues to track positively. Average wage growth, after remaining stagnant for over a decade, is finally picking up. Household balance sheets are comparatively healthy.
- Debt markets have continued to function normally, and interest rates remain historically low across the maturity spectrum.
- We are closely monitoring corporate results and managements’ “color commentary” on business conditions and outlook in the ongoing fourth quarter earnings season. The persistent weakness in crude oil, along with the stubborn USD strength, is clipping earnings estimates for ’16, as it did the previous year.
- As expected, in December the Federal Reserve hiked overnight interest rates for the first time in over nine years. We doubt that the Fed will be unduly aggressive in hiking rates, absent inflation triggers or other indications that the economy is beginning to overheat. Any policy moves are likely to be slow and deliberate.
- In times of market stress, correlations converge, meaning markets fall in lockstep. The US market is being dragged lower as we trade off global volatility in the short term. We resist the temptation to overreact to the noise stemming from overseas markets, but continue to pay close attention to the fundamentals of corporations and the global economy.