January 28, 2016

January 28, 2016

Market Summary
The U.S. is currently in a market correction.  What should we do during this correction?  Does the correction signal that a recession is in store for 2016?

There is no doubt that the U.S. market has followed most other world markets into a correction phase.  As of this writing, the U.S. market is down about 11 percent from its high in early November, and down about 8 percent since January 1, 2016.  Many other world markets have been in correction phases for years: all emerging markets, and even much or Europe when measured in U.S. Dollar terms, have declined — most emerging markets were down about 20 percent in 2015.  Commodities have been in a major correction phase since the U.S. Dollar began its ascent a few years ago.

We at GIM have been fortunate that our investment style limits risk during market corrections because of our policy of holding cash or hedging part or all of client accounts during those periods.

Is the U.S. economy in a recession?  No… the U.S. economy will continue to grow slowly, probably between 2 and 2.5 percent in 2016.

That is a rate of growth that is very similar to the 6-year average growth rate since the end of the last recession in 2009.  During the period from 2010 to 2015, real U.S. GDP growth (real growth is before inflation) has been slightly above 2.1 percent, according to Bloomberg.  The recovery from the last recession has been the slowest economic recovery in the U.S. for many decades.  Many economists argue that the slow recovery is due to high debt levels, the proliferation of regulatory burdens, and higher taxes.

On the one hand, the economy has grown slowly since 2010; on the other hand, U.S. stocks have turned in a good performance from the bottom in March, 2009 until the beginning of 2015.  In 2015 and early 2016 to this date, U.S. stocks are down about 11 percent.

Today the markets are nervous, investors are worried, and the media are downright frightening when discussing economic, commodity, international, and political news.

We know that excitement, fear, and euphoria spur sales for media, and therefore we’re skeptical about much of the hyperbole we see in print and on TV.  The reality is that the U.S. will not fall into recession in 2016 based upon fundamentals as they currently exist.

If the U.S. Dollar stops rising, the likelihood of a recession is further lessened.

According to many statisticians, the slow U.S. growth and persistent negative U.S. data surprises are strongly correlated with the change in the U.S. Dollar.  A slowing of U.S. Dollar appreciation to 5 percent per annum (from the more rapid pace of the last 4 years) will cause U.S. data to stop creating negative surprises.

Today, the U.S. economy and corporate profits are set to grow modestly this year.

Unless a banking crisis erupts somewhere in Europe or Asia, or unless global psychology becomes so negative that the great majority of global investment slows dramatically, the U.S. will be recession-free in 2016.

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