The first sentence of my market update for last January went like this: “U.S. stock markets dropped across the board in January, as investors reassessed their risk tolerances.” Sound familiar? I went on to note that the primary concerns were slow earnings growth, caused by weakness elsewhere in the world, and a strong dollar. Again, does that ring a bell?
It’s hard to believe we're only one month into 2016—with everything that happened in January, last year seems like a long time ago. But many of the trends that dominated 2015 are still active, and we can learn quite a bit by seeing how they played out.
Top trends of 2015
Looking back through my commentary last year, several key themes stand out:
1. Earnings growth anxiety. I wrote three times about slowing earnings growth and seven times about how earnings beat expectations, which typically reflected how the markets were doing that month. As this shows, what matters for stock market performance isn’t necessarily how earnings do on an absolute basis but how they do relative to expectations. With expectations declining right now, positive surprises are certainly possible and could result in the market doing better than expected.
2. International risks. We started 2015 with the Greek election in January, moved though the very real prospect of a eurozone collapse, the Russian invasion of the Ukraine, slowing Chinese growth culminating with the Chinese market crash in July, and then a surprise yuan devaluation. With Italy’s banking system under threat and Chinese growth still slowing, these concerns remain very much alive today.
3. U.S. economic weakness. Almost every month, some statistic declines or comes in below expectations, sparking another round of concern. GDP growth dropped to negative levels at the end of 2014, government and business investment was down, and consumer spending growth was below expectations almost all year. Employment growth slowed in September and October, prompting major worry.
We have the same concerns now, and for the same reasons. Fortunately, we also have the same strong employment growth that carried the economy through 2015. As long as job growth continues, the U.S. economy should continue to plug along, just as it did in 2015.
4. Stock market ups and downs. With the exception of August, markets generally followed earnings expectations and whether companies had beaten them or not. August, of course, was one of the worst months in years, with U.S. markets dropping on the Chinese market crash and surprise yuan devaluation. This overwhelmed the positive U.S. and earnings news, which is also pretty much what happened in December and this past January. It was a back-and-forth year, with external shocks driving the market down and the solid U.S. economy pushing it back up. Again, this looks very likely to continue.
Reflecting on 2015 as a whole, it’s interesting to see how these recurring themes foreshadowed how the year turned out. With the back-and-forth in growth and earnings, with the ups and downs as one international crisis gave way to the next, you would have expected a slowly growing economy and a flat stock market, and that's exactly where we wound up.
What does this mean for 2016?
It’s clear that the trends we’re so worried about now have been in play for at least the past year. Very little in the papers is actually news. Although we may look at today’s risks and feel that things have gotten materially worse, they really haven’t.
Slowing earnings growth has been with us for a while, and markets have largely recovered when companies beat expectations, as they do consistently. Concerns about China aren’t much worse than those about the collapse of the eurozone, especially if you factor in the Russian occupation of Ukraine. U.S. economic growth has bounced up and down, with periods of slower growth, but has continued at a pretty steady pace.
Although growth has been slower and the markets more volatile than we might like, we haven't moved into recession or entered a bear market. Despite some very real concerns, there hasn’t been a new crisis here in the U.S.
The more things change . . .
Based on the themes of last year, 2016 so far is more of the same. Unless something changes, expect continued employment and spending growth, but at a slow pace. Expect market volatility, but (absent more external shocks) not a bear market. Expect a fairly normal year, with the economy continuing to muddle along and markets trying to process what’s happening in the rest of the world.
It could be better, but it could also be a good deal worse.