Yahoo Finance 6 Questions About the Stock Market In 2016
The year started with panic selling that tugged the Standard & Poor's 500 index down roughly 10 percent into so-called "correction" territory in January. Concerns over Chinese growth, fresh lows in crude oil prices and what it could all mean for the U.S. economy pulled the rug from under the stock market to start the year.
Is this the harbinger of more declines ahead? Or was the swift retreat a healthy correction to relieve some of the froth from the market's lofty levels?
Only time will tell. Here is a look at six questions many investors are asking right now.
What triggered the sharp stock slide? China, crude oil and panicked selling are all excuses for the quick, massive sell-off to start the year. Long-term investors can take heart in the idea that many analysts believe there was a disconnect between market action and underlying economic fundamentals. The stock slide was primarily driven by sentiment and momentum, says Bill Northey, chief investment officer, private client group for U.S. Bank in Helena, Montana. In the short term, sentiment and momentum can simply overpower the underlying fundamentals of earnings, valuation and economic growth, he says.
Is the U.S. headed for a recession? Nothing unsettles an investor more than flashing red on financial news channels as news anchors report on another day of massive market declines. Take heart: Economists expect the U.S. economy to continue to grow in 2016 with a GDP pace in the 2 percent to 2.7 percent range. Few economists expect the economy to plunge into a recession. "Jobs are what really matter to the real economy, and job creation has been at an unprecedented rate over the past three years. I don't see a recession for at least a year," says Brad McMillan, chief investment officer at Commonwealth Financial Network in Waltham, Massachusetts.
Are stocks heading for a bear market? A 10 percent pullback in stock prices is generally called a correction, while a 20 percent decline is considered a bear market. Long-term investors can look to historical evidence and odds to help calm jittery nerves. Since the 1920s, eight of the 10 bear markets were accompanied by a recession, McMillan says. "We normally don't see a bear market without a recession, and we aren't in a recession," he says.
Could the Chinese slowdown trigger a global recession? The panic over China is looking increasingly overdone. The Chinese economy grew at a 6.9 percent pace in 2015, and while it's down from the torrid double-digit pace prior to the global financial crisis of 2008, it is still a healthy pace of growth -- double the expectations for U.S. output this year. While we do live in a global economy, the direct impact on the U.S. from a slowing Chinese economy is muted. "If China slows down, it will have an effect on global growth, but it is not a primary concern for the U.S. sliding into recession," Northey says.
Will the Fed pull back on expected interest rate hikes? The Federal Reserve has put financial markets on alert for as many as four 0.25 basis-point rate hikes in 2016. Credit Suisse issued a new report last week stating they believe the probability of an interest rate hike in March has dropped to less than 50 percent. Even if the Fed continues on its stated rate hike plan, McMillian notes that "When the Fed is tightening, it means the economy is improving, and rate hikes are usually positive for the stock market up until the 3 to 4 percent range." The Fed's official rate now stands at 0.25 to 0.50 basis points, still extremely low by historical standards.
What drives stock prices over the long term? While momentum traders had their day in the sun on the recent stock price correction, over the long term, stock prices are driven by corporate earnings growth and valuations, Northey says. "We do still appear to be expanding in the mid-single digits for earnings throughout 2016," he says. S&P 500 earnings per share are forecast to grow 8.6 percent in 2016, according to S&P Capital IQ.
Nonetheless, there is nothing like a swift stock price collapse to refocus your attention on your money choices. Now may be a good time to revisit and potentially tweak your own portfolio. If the recent market volatility has injected some fear and panic regarding your own investment strategy, you may need to re-evaluate your portfolio allocations. "Is it appropriate for your risk tolerance?" Northey says.
Do you plan to use the money soon? Are you about to write another college tuition check, make a down payment on a house or start an expensive home improvement project? "If you need money in the short term, take some out and put it into lower-risk investments, like short-term government bonds or a money market fund. The priority on short-term money is getting it back, not making money on it," McMillan says.
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