S&P 500 closes lower on global growth fears, falling oil prices

I have found that when the market’s going down and you buy funds wisely, at some point in the future, you will be happy. You won’t get there by reading. Now is the time to buy. – Peter Lynch

In another volatile week for stocks, the S&P 500 Index closed lower again and officially entered correction territory as fears arose over slowing global growth and the effects of declining oil prices. It was back in August that the stock market suffered a similar fate as stocks plunged after China devalued its currency in an effort to increase exports and reignite growth. While stocks rebounded from those steep losses five months ago, it remains uncertain whether they can bounce back again. The price of oil continues its downward trend and fell over 10% last week to close at $29.42 a barrel. While low oil prices are a positive for the economy on a long-term basis, in the near-term they are having an adverse effect on energy sector stocks and the broad market as a whole. Compounding the problem is the likelihood of substantial job losses in the industry and the possibility of bankruptcy for the weakest companies that are overleveraged. The fact that oil prices continue their slide is more a function of excess supply that insufficient demand, but worries have surfaced that global demand, especially from China, is weakening. The fourth quarter earnings season also began last week and it was hoped that better-than-expected corporate earnings would enable the stock market to stabilize and gradually work its way higher. The banks dominated the profit reports last week and, for the most part, the results were impressive as JP Morgan Chase, Wells Fargo and Citigroup all beat earnings expectations. But justified or not, fears of slowing economic growth mean that the Federal Reserve will raise interest rates more gradually, a scenario that does not help bank interest rate margins. Last week’s economic data was also decidedly mixed, only increasing the uncertainty about future economic growth and the direction of the stock market over the near-term.

Last Week

Retail sales for December were slightly better than expected but for all of 2015, retail sales grew only 2.1% compared to an average rate of 5.1% from 2010 through 2014. Much of the weakness in sales was due to plunging gasoline prices.  Industrial production for December also fell slightly as did the producer price index (PPI), which wound up dropping 1% for the year, largely the result of falling gas prices. Although jobless claims rose last week, they remained under 300,000, the 45^th straight week that they have been below this level and further proof that the labor market is strong. The January consumer sentiment index was at 93, slightly better than the previous month’s reading.

The Federal Reserve’s Beige Book showed that the manufacturing, agricultural and energy sectors continued to struggle while the consumer and housing sectors were on solid footing. Comments were also made that price inflation remained well under control.

For the week, the Dow Jones Industrial Average dropped 2.2% to close at 15,988 while the S&P 500 Index also declined 2.2% to close at 1,880. The Nasdaq Composite Index fell 3.3% to close at 4,488.

This Week

Both December housing starts and existing home sales are expected to increase and confirm that the housing sector continues to improve. The consumer price index (CPI) for December is expected to be flat as weak energy prices keep inflation low. The U.S. Energy Information Administration (EIA) releases its report on oil inventories.

In overseas news, China releases important economic data on Tuesday, including fourth quarter gross domestic product (GDP), industrial production and retail sales. The European Central Bank (ECB) meets to discuss interest rates, which are likely to remain unchanged, and the Organization of Petroleum Exporting Countries (OPEC) releases its monthly oil-market report.

Earnings season gets into full swing as financial companies such as Morgan Stanley, Bank of America, Goldman Sachs, Northern Trust, Charles Schwab and American Express will again headline the week. Other prominent companies on the agenda include IBM, General Electric, Verizon, Union Pacific, Johnson Controls and Schlumberger.

Portfolio Strategy

With the recent volatility in the stock market, investors are once again feeling anxious and may be tempted to abandon their long-term investment plan and sell their stock holdings. Studies have proven over and over again that investors who try to time the market by moving in and out based on their views of where the market is headed significantly underperform a simple buy and hold approach using asset allocation. Many so-called market timers often sell their stocks after prices have already fallen considerably. If they are fortunate enough to get out at the right time, they squander any gains they might have realized by getting back in at the wrong time after the stock market has risen substantially. Unfortunately, there is no bell that rings when the market has peaked and there is no bell that rings when the market has bottomed. Over the long-term, stock prices tend to follow earnings, but in the short-term, there are far too many variables that make it impossible to correctly predict the near-term direction of stock prices. As Benjamin Graham once said, in the short run, the market is a voting machine, but in the long run, it is a weighing machine. For this reason, the best approach to successfully grow your investments over the long-term is to have an asset allocation plan that is diversified across all major asset classes and styles that helps reduce the portfolio’s overall risk and provides the potential for higher returns.