Financial markets around the globe were extremely volatile in 2015, even though the year ended up essentially flat. A handful of geopolitical issues appear to be the culprits, and the first few weeks of 2016 have already seen even more dramatic corrections in the markets.
Many investors worry about slowing growth in China, the world’s second-largest economy after the United States. Yet, China’s growth has been slowing for several years; its government has been trying to control that decline by cutting interest rates and, more recently, through devaluation of its currency (the yuan). The world’s oil markets are also in decline, as supply increases and demand lags due to increased energy efficiency and weakened European economies. According to a New York Times report, the oil industry – with its long history of booms and busts – is now in its deepest downturn since the 1990s.
“Iranian oil is coming to market. That’s not a surprise. China is slowing down and deleveraging. Also not a surprise,” Kenneth Rapoza wrote in a January 20 Forbes.
These facts may not come as a surprise to business reporters like Rapoza, but they are dominating news headlines and creating anxiety for investors who find market volatility difficult to stomach. According to the latest issue of Schwab Investing Insights, correlations have shot higher across asset classes and greater global interconnectedness suggests ongoing bouts of extreme volatility.
“To that, we say, stay calm,” wrote authors Liz Ann Sonders, Brad Sorensen and Jeffrey Kleintop. “There is a glimmer of hope following the running to go nowhere action of 2015.”
Since 1970 there have been six “flat” years for the S&P 500 (-2 percent to +2 percent), and following those years, the Index returned between 11 percent and 34 percent. While geopolitical issues, some profit taking and global growth concerns have contributed to a rough start, the authors remain optimistic about 2016.
“We don’t believe the long-running bull market is ready to die just yet,” they wrote