Concerns over a slowdown in Chinese economic growth and plummeting oil prices have been credited with being the major factors contributing towards the dramatic volatility in global stock markets thus far in 2016. We believe that this January selloff, the extent of which has surprised many, appears overdone based upon the following factors.
Stock Market Valuations
After this most recent selloff, the stock market, as measured by the S&P 500 index, could now be described as being fairly valued when compared to longer term, historical averages. While stocks can, and may, become even more attractive from a valuation standpoint in 2016, it would be hard to argue that the market is currently grossly overvalued.
• S&P 500 Current P/E Ratio* = 16.34 (Current Price/Trailing 12 Months Earnings)
• S&P 500 Forward P/E Ratio* = 13.20 (Current Price/Estimated Earnings for Next Year)
Versus
• S&P 500 Historical P/E Ratio (25 years)* = 16.67
*All data provided by Bloomberg as of January 20, 2016.
Economic Growth
Global developed market economies, while not knocking the cover off the ball by any means, are projected to experience further growth in 2016. Additionally, those concerned with the impact of low oil prices on economic growth in the U.S. should remember that 70% of economic growth, as measured by Gross Domestic Product (GDP), comes from consumer spending and lower oil prices (which are likely to move even lower over the short term), while having a negative impact on the Energy sector, can have a positive impact on the purchasing power of the consumer. Of course, China’s slowing economy and its impact on global economic growth remains as a concern and we will continue to pay attention to the success of the Chinese government in promoting future economic growth, or perhaps preventing further declines, in their homeland.
According to the 2016 Global Outlook from The Conference Board:
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