China, Oil and U.S. Data Lead to Risk-Off Sentiment01-19-2016 |
Sources: Equity Market, Fixed Income and REIT returns from JP Morgan as of 01/15/16. Rates and Economic Calendar Data from Bloomberg as of 01/19/16.
U.S. Stocks (as measured by the S&P 500 Index), while posting gains on three of the five trading days last week, still experienced significant intra- and inter-day volatility that ultimately lead to a weekly loss of 2.2%. Heading into Friday, stocks were flat for the week but weaker than expected Inflation, Retail Sales and Industrial Production numbers, caused bearish sentiment to take over and the S&P 500 Index fell over 2%. This was the third daily loss of over 2% this year and the second consecutive week of losses for the benchmark index which is now almost 8% lower than its 2015 closing level of 2044.
Concern over China’s slowing economic growth and a stronger correlation of the stock market to the price of oil are primarily to blame, in our view, for the broad-based selloff seen globally in what can be referred to as a “risk-off” trading environment. The terms “risk-off” and “risk-on” have been made popular by the tightening relationship of global markets that has developed since 2009. On a “risk-off” day, one could expect to see risk-based assets, such as stocks, fall and safe haven assets, such as investment grade bonds, rise. The reverse scenario would be expected to play out during a “risk-on” day.
It is our belief that the U.S. and Global economies will continue to improve in 2016, however, given the length of this bull market cycle and the number of global economic and central bank uncertainties that persist, volatility will likely be high at various stages of the year. Investors should not only take this opportunity to reevaluate their own risk tolerance to ensure they are able to stomach wider price swings, but should also carefully look at their asset class and security selection. While prices have trended in the same direction, the degree of their movements has been different. Consider that the worst two sectors of the market so far in 2016 have been Financials and Materials, which are each down over 10%. On the other hand, the best two performing sectors Utilities and Telecom are up 0.3% and down 1.9% respectively. This is only one example of the types of divergences that exist, thus making the proper balancing of your portfolio strategy essential. If you would like to have your portfolio reviewed, please do not hesitate to speak with your Hennion & Walsh Financial Advisor or a member of the Hennion & Walsh Asset Management Team.
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