The stock market started off 2016 in a very negative fashion. At the same, the economy especially the labor market, was showing signs of improvement. For many investors, this type of disconnect can seem to be quite perplexing.
The negative tone of the stock market has clearly been caused by negative international events. This is primarily due to the situation in China, though a testing of a nuclear device in North Korea, also contributed to the market downdraft.
The situation in China is basically a continuation of the events that occurred last year. As I have mentioned previously, the Chinese economy is in transition — from one dominated by manufacturing and exports, to one that will ultimately become more services oriented, like economies in developed countries.
What makes the situation in China more complicated is that the government still exerts significant control over the economy. This control extends to their stock market, where their government gets involved in the trading of securities. Because of the uncertain action of the Chinese government this causes volatility to become much more significant than it would be otherwise.
In the past year, we have seen large swings in prices for Chinese equities on both the upside and the downside. Unfortunately, the first week of January was one of these periods where Chinese stocks were significantly down.
Because of the size of the Chinese economy, now almost as large as the U.S., there are repercussions to world markets.
What would ultimately be of concern to U.S. investors would be if the current turmoil in the Chinese market impacts our economy. For the most part, a slowdown in China is not going to affect the U.S. economy much, despite China’s large size. This is due to the fact that exports to China are not a very significant portion of the U.S. economy. Certain companies that have significant business interests in China will see some impact, but most corporations will not be overly affected.
In our local area we may see a more significant impact due to the Chinese economy relative to other parts of the country. Certain portions of Southern California have large Chinese populations, notably the San Gabriel Valley and the Irvine area. This would likely have a mixed impact on real estate prices. More Chinese people may want to invest in our area, but if they are poorer due to a weak stock market, they might spend less on high-end properties.
The employment report that came out for the month of December was quite strong, and clearly shows the U.S. is not being impacted by China. The 292,000 net new jobs created was a strong figure. Weather was warmer than normal throughout the country in December, which helped the construction industry. Even without the benefit from the construction industry, jobs created would have been around 250,000.
I have previously cautioned about not placing too much confidence in one month’s numbers.
However, looking at the past three months, job growth has averaged 284,000 over that period, well above the 200,000 figure we have experienced over the past year. Most likely this pace of job growth will not be maintained in 2016, but it does signify that the labor market is fairly healthy for now.
Further confirmation of an improving economy was the strong auto sales for the month of December, which pushed 2015’s sales to nearly 17.5 million units. This was an all time record number, just surpassing the total from the year 2000. A normal year would have sales between 15 to 16 million units. Certainly lower gasoline prices played a role in the record amount of sales, but an improving job market and low interest rates also helped.
With the stock market starting the year off poorly this certainly can be causing some unease among investors. However, given that the U.S. economy appears to be on solid footing, would lessen the odds of a major stock market correction. China will certainly be in the news for quite some time, but even if its economy struggles its impact on the U.S. should not be too significant.
for those investors who might have less in stocks than their long term goals this small correction would be an opportune time to add to the stock market.
However, I would not recommend that investors go over their long term targets, as I would not consider the stock market to be necessarily undervalued at the present time.
