Vermillion Financial Advisors’ Investment Committee Market Commentary

A bear, representing a Bear Market.
As a result of the recent market turbulence in the U.S. and global stock markets, rumors of a possible recession, political rhetoric and the 24/7 media machine going into frenzy mode, we thought it best to address the most common questions we have been asked over the last two weeks.


Q:  Is this a repeat of the 2008 stock market problems?

A:  No, that’s extremely unlikely.  There are few bubbles of concern today that rise to only a fraction of the housing bubble that began to unwind in 2008.  The U.S. economy is solid – but not spectacular.

The 8% decline in the S&P 500 so far this year has been cushioned in our client portfolios by various shock absorbers, including stop losses, cash, bonds and a variety of alternative investments that have been holding up well, and in some cases even going up in value.  It’s good to note yet again that we expect a 10% or higher stock market correction every year or two.

Q:  Is China going to cause a global recession?

A:  That’s doubtful.  Fortunately for the U.S., we export very little to China (representing about 1% of our GDP or Gross Domestic Product), and that is only an amount equal to the economy of the state of Arkansas.  If China were a true, free democracy, we would be worried about a hard landing in their economy.  Instead, their Socialist Market economy (their favored terminology of what you get when you cross capitalism with communism) is once again being stimulated by the government and not the people.  Their “mountain of debt” is well offset by a mountain of cash in the form of U.S. Treasury securities and other liquid investments.  China’s problems will be very disruptive internally in China and somewhat disruptive to various U.S. and overseas companies who have significant operations in China.

It is not surprising that a fast-growing economy transitioning from manufacturing to consumer services (now one-half the GDP of China) would run into problems.  China is making every rookie mistake in the book, but it is learning quickly.  Global recession is unlikely, and we are highly skeptical of prior year forecasts that say China will become the #1 economy in the world in the next 20-30 years.

Note that many countries are already in a recession having nothing to do with China.  We believe that the countries who are net exporters of oil will continue to have a rough go of it.  A country such as Russia or Brazil that relies a great deal on selling oil will continue to be in a recession as long as oil prices are at current levels ($30/barrel).  Other countries that rely on selling commodities are being rocked by the falling commodity prices.

On the other hand, lower oil and commodity prices should be a boon to countries that are net importers of oil, such as India and the U.S.  However, considering the number of states where the oil boom is slowing down, the U.S. picture is more muddled on positives versus negatives with regard to the benefits of low oil prices.

Q:  What is causing all this volatility in the market?Cityscape and charts representing upward prices.

A:  China, Oil, and the Fed

CHINA:  China accounts for less than one percent of our GDP, so its economic importance to the U.S. is limited, but tends to get exaggerated in the media.  China’s economy is very important to the rest of the world as it accounts for 70 percent of the global demand for copper, steel, and aluminum, and 50 percent for coal.  Their slowdown is one of the main causes for the meltdown in commodity prices.  In addition, volatility in their immature markets, a pending devaluation of the yuan, and the government’s excessive meddling all make U.S. investors nervous.  China will continue to influence our financial markets because of the uncertainty of Chinese policy and their lack of transparency.

OIL:  Years ago, falling oil prices would have been a clear net positive for our economy because we were a nation of consumers using large amounts of oil.  Now we are also producers of large amounts of oil, and that is the difference.  A meaningful part of our economy is suffering the effects of lower oil prices through job cuts, lower cap-ex spending, and likely junk bond defaults.  The stock market needs oil prices to stabilize before it will find a bottom.

The FED:  In a recent speech, a Fed governor professed that the Fed is remaining on track to raise rates four times this year.  It was exactly what the markets did not want to hear given new concerns about our weak economic growth and the fear of a U.S. recession.  Now, unfortunately, if the Fed holds off future rate hikes altogether, the markets will fear the U.S. economy is dangerously close to recession.

Q:  What is VFA’s current viewpoint?

A:  These three factors are the primary culprits for this year’s terrible start in the stock market.  If it sounds like a replay from last summer, that’s because it is.

On January 19th, stocks tested prior August lows for a second time, but this time, the support levels didn’t hold.  It now appears that the stock market will trade lower until at some point logic will take over and the price that people are willing to sell their stocks and move to cash will finally seem too good to be true.  We started to see that occur on January 21st and 22nd, thus showing the first positive result for the week in 2016.  Considering that the average Price Earnings ratio for the S&P 500 has fallen below 15 times the 2016 forecast earnings, the price of stocks should now be considered more reasonable.  It is only a matter of time until greed moves in and starts snapping up all the cheap stocks offered by fearful investors who give up their “Bad Stocks” for the safety of cash, thus halting the stock market slide.

The VFA Investment Committee keeps watching with interest.

Note: The opinions voiced in this material are for general information only and not intended to provide specific advice or recommendation for any individual. Please remember that past performance of investments may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product made reference to directly or indirectly in this newsletter (article), will be profitable, equal any corresponding indicated historical performance level(s), or be suitable for your portfolio. Due to various factors, including changing market conditions, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this post serves as the receipt of, or as a substitute for, personalized investment advice from Vermillion Financial Advisors, Inc. To the extent that a reader has any questions regarding the applicability of any specific issue discussed within this newsletter to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. A copy of our current written disclosure statement discussing our advisory services and fees is available for review upon request.

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