Brouwer & JanachowskiJanuary 20, 2016
It’s been a scary start to the New Year. Market volatility has picked up, with almost all major global market indexes registering losses so far this year. Many investors question whether this recent downdraft is predictive of a weakening global economy. Fears that a slowdown in China, drop in oil prices, and tightening by the Federal Reserve will lead to a recession, seem to be the current hot topics in the financial media. But are the markets forecasting future events, or is market weakness simply a knee-jerk reaction to concern about where the China, oil, and Fed tightening stories could lead?
Howard Marks, one of our favorite contrarian value investors, wrote in a recent commentary memo:
Especially during downdrafts, many investors impute intelligence to the market and look to it to tell them what’s going on and what to do about it. This is one of the biggest mistakes you can make…Market participants have limited insight into what’s really happening in terms of fundamentals, and any intelligence that could be behind their buys and sells is obscured by their emotional swings. It would be wrong to interpret the recent worldwide drop as meaning the market “knows” tough times lay ahead.
In our view, current market weakness is a typical correction that is an integral part of the long-term market cycle. In other words, they happen, expect them, and try to remain calm. The last correction occurred in 2011. One of the biggest dangers of corrections is that fearful investor reactions lead to harmful consequences—selling and locking in losses. Marks discusses investor psychology and risks to making emotional decisions in his memo. If you’d like to read the entire memo, it can be found at https://www.oaktreecapital.com/insights/howard-marks-memos.
In our view, there are no convincing signs of a recession in the U.S. The drop in the price of oil has punished energy companies, but we don’t feel it represents a threat to the U.S. economy. China’s economic slowdown and market volatility is making headlines. So while China’s large economy might be perceived as having a significant impact on our economy, it is not substantial, and, in our view their slowdown does not pose a threat to the U.S. economy.
Jittery markets have a tendency to make investors nervous. It’s normal to be concerned. However, this is a time requiring that investors stay focused on the big picture, make rational decisions, and not give sway to emotional impulses.
--Steve Janachowski, Brouwer & Janachowski, LLC
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