There’s an old cliché that says things are always darkest before dawn. However, it turns out if you’re down to choosing between shades of black, you’re already deep in a hole. That seems to be where we are in 2016, as we’ve seen what’s traditionally the strongest month for stocks turn into long and bitter carnage. Many investors breathed a sigh of relief when the calendar clicked over to February but so far the second month of 2016 has been just as bad as the first and we could still have a long way to fall.
The Dow lost 178 points on Monday and the S&P 500 slid another 1.4 percent. The futures before Tuesday’s open pointed to even more red ink. Many people opening their 401(k) statements from January must be wondering where it’s all going to stop. If you’re looking for relief anytime soon, don’t get your hopes up.
The Fed, Still
Federal Reserve Chairman Janet Yellen has started explaining and that’s never a good sign. Recently she had to spell out to investors that the Fed wasn’t deliberately trying to slow down the economy but merely trying to get away from emergency near-zero interest rates. Investors will doubtlessly be relieved to learn that the ill-timed rate hikes were not intended to crater the economy; that was just an accident. The time to raise rates was during the go-go years of 2012 and 2013 but the Fed didn’t want to slow down the economy then either. If you’re thinking nothing the Fed does makes a bit of sense lately, join the club. We’re having t-shirts made…
Small Business Confidence Slides
The National Federation of Independent Business reported that small business confidence slid to its lowest level in two years. A majority of small business owners are worried about sales in 2016 and that worry will translate into reduced hiring. That’s very bad news because while big, multinational companies get all the press, it’s small businesses that create the most jobs.
Stocks Nowhere Near Bottom
The super-strong dollar is going to continue weighing on corporate earnings and lower earnings will in turn keep downward pressure on stock prices. The Fed’s badly timed interest rate hikes will put even greater pressure on companies carrying a load of debt. Like the old song goes, the wheels on the bus go round and round and our stock portfolios are trapped in a vicious downward spiral.
China’s Not Better, Just Closed for the Holiday…
As long as China remains mired in slow growth we’re not going to get any relief from the rest of the world. Luckily equity markets in China were closed for the Chinese New Year, so they can’t fall any farther until trading resumes. But as their over-extended banking system hits the fan, things are only going to get worse – for us.
Oil Will Continue to Slide
The ultimate irony is that the world experienced more fighting and economic depression from having too much oil than we would have from not having enough. Everyone was prepared for an oil shortage; we know how to deal with that. But a glut, now so much of it we’re running out of places to store it; few saw that coming. That overhang of storage will keep a lid on prices for a long time to come. So if oil companies were hoping for any quick relief, they can forget it, as can many of us. Layoffs will continue, both in the oil and gas sectors and in the supply chain, including steel workers, retail, transportation and even real estate.
Fortunately, some of the same factors depressing the economy are also providing a relief valve for small investors. The strong dollar is keeping downward pressure on commodities and that’s kept gold prices from exploding, though they are inching north. Gold has performed better than other asset classes since the beginning of the year but prices are still at bargain levels due to the temporary strength of paper currency. Defensive investing is the new normal for small investors but the window’s starting to close.