A weak start to 2016 for equity markets
Jeff Keen looks into what has been an inauspicious start to the year for equities
Based on data since 1927, this year has seen the weakest start for the S&P 500 index for 89 years (at least). As at Monday 8th February the index was down 9.3% over the first 25 trading days. What happened to the traditional New Year rally?
Sharp movements in markets are often associated with high levels of investor fear which, more often than not, subsequently subside, allowing markets to recover. Our assessment of the recent move is that this will take time.
The primary driver of the weak market is the worsening outlook for profits, with analysts downgrading profit expectations for this calendar year quite aggressively. Some commentators are now expecting a recession to come into focus during the next few months. We hesitate to make that call yet but there are undoubtedly some weaker economic signals starting to appear and it is not clear that Central Banks really have the solutions to convince markets that they can prevent an economic slowdown.
On the positive side, the low level of investor sentiment and moves in markets in recent days mean that prices do at least discount some of that negative fundamental change. However, our strategy remains one of constraining risk and waiting patiently for more positive signals before reallocating to risk assets.
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