Global Stock Market Turbulence: An Excess of Anxiety?

The world’s equity markets are off to a rocky start in 2016. The basic problem, in our view, is a rising fear that a slowing global economy will ultimately lead to recession, disappointing corporate earnings, and bear markets in many countries, including the U.S. What are the sources of these fears and are they justified?

In our January 8, 2016 Outlook, we expressed cautious optimism: “our most probable scenario for 2016 is substandard global GDP growth, modest advances for most key stock markets, very low returns for bonds and money-market funds, and a continuation of challenging conditions for commodities, including oil.” We also identified four issues (the Chinese economy, Federal Reserve policy, the dollar, and commodity prices) where fears of a surprising negative development could damage investor sentiment. Rising concerns in all four issues have created a crescendo of pessimism thus far in 2016, which in our view has become excessive and unwarranted.

Of paramount concern to investors is that a combination of overly aggressive Fed rate hikes, a collapsing Chinese economy, a surge in the dollar, and falling commodity prices will push the global economy, including the U.S., into recession. We are not convinced that any of these fears are justified, much less that a perfect storm of all these negative developments will hit simultaneously.

We maintain our Outlook that a U.S. recession and bear market is unlikely. If we are correct, it will still take time for excessively negative sentiment to subside, and thus we anticipate further volatility in global markets. We also emphasize our commitment to monitor closely future economic and financial market developments for indications that our current viewpoint is too propitious and investment adjustments may prove necessary.