Rounding Up Start-of-Year Fears

A look at the various factors most pundits allege are behind the recent market volatility.

The New Year has started off rocky, and if you read financial media at any length, we are sure you are hearing many theories about the causes, what it all means, and where stocks are likely heading from here. We aren’t going to belabor any specific point in this post, but rather, briefly cover each of the major concerns and considerations we’re running across and offer some resources to give you our perspective.

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The reason we can offer you this is simple: None of the current concerns are anything all that new. While they might have a fresh twist, the root concerns haven’t changed. Nor have the facts on the ground or counterpoints that allay the fears. These are either seasonal myths or longstanding, chewed over issues that have weighed on investors for months, and in some cases, years—and the reasoning we used in the past still applies fully. We hope you find this helpful.


You can’t discuss 2016’s first week without mentioning China. Multiple issues are at play here, but most again center on fears China’s economy is about to crater. Fears of a Chinese “hard landing” are old enough now to enter kindergarten, but they became more acute in August 2015, when folks fretted China’s exchange rate reform was actually a devaluation, designed to “steal growth” from the West.

Additionally, some fretted a sharp selloff in Chinese stocks running concurrently, but it is important to note that Chinese equity markets are disconnected from the real economy. Today, most concern centers again on equity market volatility, spurred in part by China’s attempts to mitigate volatility through the installation of circuit breakers. As to currency valuation, it is worth noting China’s yuan is down only about -6%i against the dollar since August. A devaluation that size is unlikely to affect much of anything. Heck, the Israeli shekel and Brazilian real are each down almost three times as much. There is no sign things are materially deteriorating in China beyond mere media speculation.


Some fret rising tensions between Iran and Saudi Arabia, as well as a North Korean nuclear test. These are long-running sources of tension—the Shiite/Sunni divide in the former, the Korean War in the latter. History shows geopolitical tensions aren’t nearly the market negative many people presume.


Commodities markets remain weak, as they have since 2014 for oil, 2011 for metals. Faltering commodity prices create winners and losers. Oil-producing nations, like Brazil, Russia and to a lesser extent, Canada, lose. But others, like India, Indonesia and many European nations, win. On a company level, Energy and Materials firms’ profitability has been whacked (dragging down headline S&P 500 earnings), but outside these two sectors, profits are rising. Simply, this is, was and has always been a mixed bag. At this point, it is perhaps one of the more widely known factors discussed in financial media and, since surprises move markets most, its power to sway markets outside the Energy sector for long seems largely spent.

The January Effect

You can almost take it to the bank that if there is weakness at January’s outset—the first day, first week, first 10 days or even the first month—that many will argue this augurs ill for the rest of the year. Headlines are already proclaiming the first four days of this year, “the worst start to any year, ever.” “So goes January, goes the year,” the old saying goes. The thing with this saying is, it’s wrong. Since 1926ii, including dividends, 34 Januarys have been down. In 18 of those, the year finished up, including January’s drop. Just last year, the S&P 500 finished January down -3.0% including dividendsiii. While the year wasn’t stellar, the S&P did rise 1.4% including dividends, meaning selling at January’s close would have cost you over 4%, not counting trading costs and taxes. This is a seasonal myth you shouldn’t get caught up in.

i Source: FactSet, as of 01/07/2016. RMB vs. USD 08/10/2015 - 01/06/2016
ii Source: Global Financial Data, Inc., as of 01/07/2016. S&P total return, 1926 - 2015
iii Source: Global Financial Data, Inc., as of 01/07/2016. S&P total return, 1926 - 2015

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