Why investors should stop freaking out about the stock market

The U.S. stock market got off the worst start this year in almost a century.  This prompted fear from investors, and Warren Buffett compared the stock market with a “drunken psycho”.  Coming off the first correction in four years this last fall, with little more than a minor recovery, the media is in a frenzy with many calling for huge future declines and oil dropping to $20 a barrel.  When there is fear, there is opportunity.  This is not an easy premise when many investors are coming off stagnant returns over the last year. 

China

Last time I checked, S&P 500 companies were located in the United States.  Although they may do some business in China, a vast majority of their business comes from elsewhere.  The Chinese economy has been slowing for the good part of 2015.  The Chinese manufacturing index and the value of the Chinese Yuan should not shock the system – experts already know the Chinese economy is slowing. This news was not new!

Oil

There was a time, in the not too distant past, when stocks would move up on even the suggestion of lower oil prices.  The premise is that lower costs at the pump provide the consumer a “tax break” which will put more money in their pockets which will flow into the economy.  Apparently, it has been “opposites day” as my kids would say, for the market over the last year.  The markets are telling us that the extremely low oil prices will have a greater negative effect on the energy industry than the extra cash it provides to Americans and companies (nearly every one) that use oil.

There is too much oil being produced now which drives down the cost.  This is simply Economics 101: Supply and Demand.  Throughout the course of 2016, oil companies and countries will either stop producing as much oil or they will go out of business.  Remember, the OPEC cartel still thinks it can manipulate the price of oil – and to a lesser extent as in the past, maybe they can.  When the cartel starts to worry and U.S. companies fail, less oil will be produced and the price of oil will increase.

The Economy

When we take a step back, maybe the beginning of this year with the stock market was a bit of an overreaction (sarcasm).  I am not suggesting the economy is growing at a blistering pace.  However, I am suggesting that there is still an expectation that the economy will grow at a solid 2.5 percent this year.  Employers are creating jobs at a robust pace, car sales are on fire, and we are nearly at full employment.  According to the Colorado Department of Labor and Employment, the unemployment rate stood at 3.9 percent in the Denver metro area at the year end.  Furthermore, Americans are feeling more confident as the value of their house increases.  It’s called the wealth effect.

After that rant, I have to throw some water on the fire.  There are still headwinds and there will be throughout the year.  Before Denverites start throwing themselves off the Republic Plaza building, the best course of action is to stick to your financial plan in a diversified allocation and look for value in underpriced stocks and asset classes.  I recommend turning off the news, taking a long walk, and putting the first three weeks of this year into perspective.  The sky is not falling!