The S&P 500 fell almost 5%, giving the second worst opening week since 1929. All European markets fell and Chinese stocks, unnerved by a new circuit breaker system, closed the week 10% lower. Overall the FTSE All-World Index lost 5.6%, as $2.3tn was wiped from stock market valuations.
Investors’ list of concerns grows ever longer. Not least among them is a slowdown in global GDP growth, perhaps dragged lower by industrial production in the US and China; increasing geopolitical tensions as Saudi Arabia and Iran trade hostile words and North Korea tests a ‘hydrogen bomb’; stubbornly falling oil and commodity prices, bringing the looming fear of outright deflation; confusion over China’s exchange rate policy, as financial authorities there aim to switch the market’s focus to a trade-weighted basket of currencies and away from its fixation on a crawling US$ peg.
Added to which, popular outcry over German immigration policy, the imposition of some intra-EU border controls and the ramping up of the Brexit debate in the UK all raise questions over prospects for the European Union and even for the future of the Euro as a currency unit. Everywhere the outlook is unclear and markets have never thrived on uncertainty.
This week fearful attention has turned to corporate earnings as the US leads off the reporting season. We would look for “the strong US dollar”, “wage growth”, “lower energy prices” and “weak global growth” to feature heavily in the Q4 2015 statements from management teams attempting to justify a lack of earnings growth. For the third consecutive quarter, the S&P 500’s year-on-year earnings are expected to be negative. If this forecast is correct, there will have been zero earnings growth during 2015 as a whole, thereby justifying the lack of positive performance by the index.
Looking forward to 2016 earnings, forecasters are currently more optimistic and expect profit growth of 7.5%. Whilst the energy sector is expected to continue to drag on earnings, the remaining sectors are expected to deliver positive growth, and with the S&P 500’s price-to-earnings valuation above its 10 year average this may prove essential for an improvement in returns. If, however, the first indications from the corporate sector are poor and we see a succession of earnings downgrades, then the market could suffer the dreadful experience of death by a thousand cuts.
At Architas, at the margins we have been de-risking portfolios since the beginning of the year, reducing exposure to mid- cap equities and increasing exposure to long-dated government bonds. Until we see greater transparency in market drivers we can only reinforce our recommendation of a diversified approach to investments.
