Just watching the news it was obvious these first weeks of 2016 have been brutal. But the full scope of the damage wasn’t clear until now. As we near the end of the month the numbers are staggering. Nearly six trillion dollars were wiped from global stocks in just the first nine days of trading. Nearly twenty one billion of that was pulled from equity funds in just the last two weeks. Those numbers are galactic in sheer scale and the pain and fear for people opening their 401(k) statements next month will be real.
The S&P 500 alone is down by six percent, with outflows of nearly thirteen billion dollars from equity fund withdrawals. Economists at Bank of America Merrill Lynch have raised the likelihood of a recession to twenty percent and slashed forecasts for even meager growth in 2016.
Shell-shocked Investors Pulling Out of Healthcare, Technology, Financials, Energy
Technology and financial funds had their largest outflows in six months, while even the healthcare sector, typically considered a defensive play, had the largest outflows in three months. The carnage spared few sectors, with energy and financials getting the worst of it as investors brace for oil sector bankruptcies and energy project loan defaults under the pressure from falling oil prices. The energy sector has already been hit with a flurry of layoff notices and there’s evidence to suggest that other sectors will soon follow.
As bad as the news was for U.S. indexes, it was even worse for emerging markets. Funds focused on emerging markets have experienced outflows every month for the last three months, with investors cashing out nearly two and half billion dollars. The downward pressure on commodities will continue to weigh on emerging markets and the volatility will continue to disrupt U.S. markets. Thanks to our new connected global economy there are few investment sectors that are immune to outside influences.
How Bad Can Bad Get?
If the numbers seem ugly now, they were even worse back in August, when we saw outflows of thirty-six billion, and forecasts of a 2016 recession started in earnest; and in 2008 when losses hit eighty-five billion dollars. That means equities could trim another third from valuations just to get back to 2015. Emerging markets also got a pounding in 2011 and never regained those highs before the current selling debacle. Given that history, it’s not at all certain that they’re going to recover this time, either.
A recession is defined as two or more consecutive quarters of economic contraction. The fourth quarter of 2015 was very close to even and some sectors, like manufacturing, are already in a recession. The outflows in high yield bonds virtually guarantee companies will lack ready capital for expansion and acquisitions. With the Fed seemingly determined to keep raising interest rates, we’re steadily taking baby steps toward the recession cliff.
It’s the Defense That Wins Championships
The new connected global economy means that the old investment truisms are no longer operational. The new optimum strategy, particularly for people in their forties and fifties, will be one of more frequent rebalancing and making age-appropriate adjustments to your asset allocation. Trimming the percentage of your wealth in stocks and increasing the percentage kept in bonds, hard assets and cash is the only safe course for those who want a safe retirement.
The steady stock market gains of the past are over and the future is one of increasing volatility and risk.
Trevor Gerszt, America’s Gold IRA Expert, is founder and CEO of Goldco Precious Metals, a privately held retirement services firm in Los Angeles specializing in wealth and asset protection. Trevor also holds a position on the Los Angeles Board of the Better Business Bureau.