Navigating Market Volatility

CIO, Ronald Sanchez, shares his views

01.31.2016 - Ronald J. Sanchez

Ronald Sanchez, Chief Investment Officer, and Carin Pai, Head of Equity Strategy, shared their views on current market volatility and what investors may expect for 2016 in our recent client conference call. You may listen to the replay here:

Listen to the Conference Call Replay

Concerns over China’s economic growth rate, low inflation globally and US monetary policy beginning the slow transition to normal have roiled financial markets in the first weeks of 2016. And, the renewed decline in oil prices has seemingly manifested those concerns. As these uncertainties play out in markets, it’s perfectly natural for investors to feel unsure. We’ve been investing in global markets across all market cycles, and we know that while volatility can be unsettling, it can also be a time for great investment opportunity.

The global markets continue to sort through the new rules of the road. A sharp selloff in China shares that resulted from a surprise currency depreciation alongside market concerns about mounting Chinese credit and falling growth estimates had a ripple effect across global markets. In addition, the price of oil, after falling nearly 40% in 2015, fell an additional 20% in the first two weeks of 2016. Many participants see the oil market as oversupplied and, as a result, particularly sensitive to the prospect of Iran exacerbating the supply/demand imbalance with additional production. Lastly, in December the Fed ended its nearly eight years of zero interest rate policy. Much was made about how a relatively small rise in interest rates would be easily handled by resilient markets. We feel it is too soon to make a judgment, but do think it is now clear that this move marked a regime change from a market perspective. The era of ample Fed liquidity to prop up equity markets seems to have ended.

These factors create uncertainty in markets, especially when added to heightened geopolitical tensions in the Middle East and North Korea, and uncertainty breeds higher volatility.

This volatile start to 2016 is not entirely surprising to us as markets learn to navigate through this changing environment. We anticipate continued periods of market volatility, and perhaps multiple market corrections, this year. However, over the longer-term, we remain generally positive on the prospects for global equity performance potential due to a host of factors, such as further declines in unemployment in key regions, an improving wage outlook for a broader segment of the global economy and the resiliency of corporate profitability. In fact, recent data in developed economies has been encouraging, including December non-farm payrolls in the United States that represented the best monthly gains for 2015 and an accelerating pace of job creation. Likewise, construction growth and consumer confidence remain reasonable, and seemingly disappointing retail sales seem less so when controlling for the decline in retail gasoline prices.

Global financial markets still face numerous risks, but the drivers of corporate profitability appear to us to be sustainable in the current business and economic environment. While fundamental challenges may certainly present themselves in the form of an unexpected economic slowdown, geopolitical conflicts, rising inflation and input costs, or an unanticipated increase in the pace and magnitude of rate hikes in the United States or elsewhere, we think the economic cycle remains intact, buoyed by continued job gains and an improving wage outlook. With this generally healthy backdrop, a robust opportunity set and a focus on the long term, we remain positive on the prospects for active equity management across a wide range of sectors and regions as we enter 2016.

This communication is intended solely to provide general information. The information and opinions stated are as of January 20, 2016, and may change without notice. The information and opinions do not represent a complete analysis of every material fact regarding any market, industry, sector or security. Statements of fact have been obtained from sources deemed reliable, but no representation is made as to their completeness or accuracy. The opinions expressed are not intended as individual investment, tax or estate planning advice or as a recommendation of any particular security, strategy or investment product. Please consult your personal advisor to determine whether this information may be appropriate for you. This information is provided solely for insight into our general management philosophy and process.  Historical performance does not guarantee future results and results may differ over future time periods.

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