It’s been an ugly start to the year for 2016. After a rocky December to finish a slightly down 2015, investors were hoping the new year would bring in better tidings. Instead, it’s been more of the same, with the year beginning with a major round of uncertainty.
First up was a marked decline in relations between two Middle Eastern powers, Iran and Saudi Arabia. After Saudi Arabia realized some political executions, including Islamic leaders respected in Iran, the Iranians became upset. Iranian people took the streets and burned the Saudi embassy in the Iranian capital. This was followed by the countries breaking diplomatic relations.
Oil initially spiked following the news, raising hopes that if nothing else, this would be a positive development for the embattled energy sector. But the optimism wasn’t to last; oil started dropping again despite the political developments, and the world is growing concerned about the possible ramifications of two more Middle Eastern nations becoming increasingly unstable. Iraq and Syria were already sufficiently problematic.
Additionally, new troubles are springing forth from China. Sunday night brought news that China’s economy was tracking well below expectations. The Chinese market opened briefly Sunday evening, mounting a 7% plunge before officials shut down trading for the day.
The government unleashed a barrage of money to try to calm markets, which worked Monday evening, but Tuesday evening brought another large devaluation of the Yuan and further Chinese equity selling.
US markets plunged Monday from the combined news, with the Dow down as much as 500 at one point before mounting a rally. Tuesday was calm, but futures markets are indicating another round of big selling coming for Wednesday.
So is it time to panic? No, no it isn’t. First things first, the Middle Eastern tension is unlikely to develop into anything significant.
Like the long-running Greek drama in 2011, 2012, and again in 2015, we keep getting recurring foreign geopolitical drama that simply isn’t important to American markets.
Middle Eastern economies, like Greece, aren’t important to international trade. US multinationals don’t have significant operations in either Saudi Arabia or Iran. Neither country would cause an international debt panic. While the headlines could be ugly, neither country is fundamentally important to the global economy.
The one thing a prolonged standoff between the countries could do would be to boost the price of oil. And given the low price of oil and domestic job losses being caused by that, a blip higher in oil might not be a bad thing.
And as to the Chinese problems, again, one must ask what’s new here. It’s no new story that the Chinese economy has been rapidly slowing over the past few quarters. The GDP growth rate is in decline, and numerous signs of stress are showing in the country’s equity and credit markets.
But we haven’t learned anything we didn’t already know in 2015. The commodity markets have already sold off to historic lows to reflect the decline in demand for goods in China.
The things most exposed to a Chinese slowdown, such as copper, oil, agricultural goods and iron ore are already down 50% or more in recent years. Sure, the pain may drag on, but it’s hard to see things getting much worse from the current dismal readings in these sectors.
Likewise, the devaluation of the Chinese Yuan continues a well-established trend from 2015. These are ominous long-term trends for the global economy, but no reason for the roughly 800 point selloff in the Dow over the past week.
Stocks usually rise in the beginning of January as investors plow money into the market to take advantage of the new tax year. Monday’s drop was in fact the worst decline to start a year since 1932, markets simply aren’t supposed to go down to start the year.
And this market is unlikely to stay down. This dip should be bought, there’s simply nothing new here that will keep the dour mood in place once the negative Chinese headlines are brushed aside. Markets plunge when novel events come to light, not when old stories are rehashed yet again.
The Chinese story is already well understood and the Middle Eastern concerns aren’t significant. For traders, this looks like a good place to buy stocks.