The two recent economic events getting credit for the horrible start to 2016 consist of the market sell off in China and the precipitous drop in oil prices. China’s supposedly failing economy isn’t actually failing, it’s just slowing down a bit, which is to be expected after several years of high growth.
Since U.S.trade with China affects only about 1% of our GDP, it is, in reality, no big deal. Traders, however, are overreacting as usual. Also, there hasn’t been much to prop up our markets yet since things like the official year end reporting of 2015 retail sales and job numbers haven’t hit yet.
What about oil prices? Why do low oil prices cause the stock market to go down? Shouldn’t low cost gasoline be a benefit to the economy? We hear this question all the time. The answer is, yes, low oil prices due to new sources of oil and efficiencies in producing and moving that oil are good for the economy. The issue is that the drop in oil prices has gone substantially beyond what can be justified based on current oil production. Global demand for oil is just not present. The excessively low price of oil indicates that many global economies are just too weak to drive up demand for oil to a reasonable level. The problem in this case is not particularly too much oil, or the price of the oil. The problem is that there is not enough real demand for oil. The logical conclusion of this is: If many of the world’s economies are not in a position to buy substantial amounts of oil, than they are certainly not in a position to buy US products either. That is (in very simple terms) why the “excessively” low cost of oil is bad for the US economy.
One silver lining to market volatility like this is the ability to tax loss harvest in taxable accounts. We analyzed all taxable accounts at the end of 2015, harvested losses and removed mutual funds that were preparing to make unreasonable capital gains distributions. The current market drop will have us readdressing all of those accounts in the first part of 2016. If you have any questions about the process, please give us a call to discuss it.
We would like to offer our full disclosure brochure, known as ADV Part 2. We make this offer every year as required by our Regulators. The document can be delivered to you at your request, by what ever means most convenient for you, hard copy or electronically. We have enclosed our Privacy Notice with your current statements.
We want to offer our most sincere thanks for your trust and loyalty, and for the opportunity to serve your investment and financial planning needs over the past year. We look forward to continuing to be of service in 2016 and many years ahead.