Uncertainty Prevails. Stay Tuned.
U.S. equity markets hit an all-time high in May of 2015; this occurred after a long recovery from the Great Recession. The recovery was slow and weak. Incomes have barely reached the levels before the Recession. Unemployment rates have returned to about 5%, but are uneven throughout the country. The labor participation rate has only recently begun to recover. Then in May 2015, markets began a decline. A confluence of factors led to the decline. The economy of China began to slow. This slowdown led to a collapse of commodity prices, especially oil, throughout the world. Normally lower oil prices would be considered good news, a tax cut really. But in this case, the drop was so significant and rapid, that producers were caught off guard. Commodity producers of all kinds had expected the Chinese economy to continue to grow; they invested and created overcapacity. In the case of oil, the U.S. became a net exporter, which had not been the case for decades. Emerging markets began to falter. Banks were under pressure again. Equity markets decided to steer clear of all this risk. Central banks throughout the world cut interest rates, some into negative territory. Currencies weakened as central bankers tried to reflate their economies with a weak currency. Into this witches brew stepped the U.S. Federal Reserve with a benighted policy to raise interest rates. They forecast four rate increases for 2016. Then having painted themselves into a corner, they did raise rates in December of 2015. The markets responded immediately tumbling more than 10% in the worst start ever to a new year. Remember the adages, “As January goes, so goes the year” and “Don’t fight the Fed”. Investors fled the market.