The New Year has begun badly for stock market investors just about everywhere. In the U.S., the S&P 500 has fallen about 5% in the first 4 trading days of 2016. In China, the Shanghai Composite Index is down more than 11% from year end, after several days of stop-and-start trading. European and Emerging Market bourses have suffered as well.
The “causes” for the weakness mentioned in the press include repeated devaluations of the Chinese Yuan since August, weak energy prices and fear that the recession in the manufacturing sector of the U.S. economy will spread to the consumer. We don’t know which of these is correct, or how long the weakness will last, but we thought we could provide some reassurance that the recent decline has brought U.S. stocks close to what we believe is fair value.
Tepid corporate earnings growth (much like 2015) and the risk of further interest rate increases by the U.S. Federal Reserve are making investors cautious in the New Year. The S&P 500 closed today at 1941. The midpoint of our estimated fair value range for the S&P 500 for 2016 is 1937. Given this estimate, we’re obviously not super-bullish about 2016, just as we were not all that excited about market prospects last year at this time. Stocks are neither particularly cheap nor dear. Some businesses have gone “on sale” over the past few days. We will continue to seek out the well-run ones for your portfolio. Remember, investing is a marathon, not a sprint.
One final note: We think the doomsayers out there who are saying 2016 looks like 2008 are barking up the wrong tree. The simple fact is that the U.S. financial system is in far better fundamental shape than it was 8 years ago, so the risks of a meltdown are remote. Yes, the Fed appears determined to be less accommodative in 2016, and that may cause greater stock market volatility, but this is more of a “normal” market condition than the constant monetary coddling we’ve seen since the financial crisis nearly a decade ago.
We will have a more detailed analysis at our Pittsburgh and Florida events in a couple weeks. In the meantime, please let us know if you have questions.