Growth fears grip the market

Weak U.S. headline economic data helped fuel the sell-off this week, but don't be tricked by short-term anomalies.

Robert Johnson, CFA 18 January, 2016 | 6:00PM

It's getting difficult to find new ways to say that market action was pervasively dismal. Equities around the world did poorly again this week, with most markets registering a 2% to 4% decline. As usual, emerging markets did the worst, and the United States did the best. Commodities resumed their normal spot as the worst performer, as oil continues to slump. Most of the action in recent weeks appears to be related to slower worldwide growth, a fact supported by falling commodity prices and falling government bond rates. The U.S. 10-year Treasury bond yield fell from 2.23% to 2.13%.

However, this week it was the U.S. economy that drove growth concerns. Both industrial production and retail sales disappointed and showed outright declines. Those, along with some inventory data, sent economists back to the drawing board with new expectations of 0%-1% fourth-quarter GDP growth, compared with prior estimates of 1% to 2%. If correct, that would move the full-year GDP growth forecast down to 2.4% from 2.5%, hardly something to get to upset about. A lot of the fourth-quarter reductions are related to volatile inventory data, near record low December utility usage, a renewed slump in the oil sector, and poor sales of anything related to cold weather and snow. With the possible exception of the oil sector, this is normal run-of-the-mill volatility that is likely to reverse itself, perhaps as soon as the first quarter. However, with weak headline data apparently spreading to the U.S. and last week’s China-related issues, investors are taking no chances and selling now, not wanting to lose all of their recovery gains.

U.S. economic news started the week on a high note with both the jobs opening report and the small-business sentiment report continuing to confirm last week's broad outline of a healthy job market. We do caution that courier jobs and weather-related construction gains are not likely to be sustained. However, the Challenger Gray layoff report, the JOLT report and the small-business report all confirm a strong but not quite spectacular job market. Budget deficit data, announced midweek, was relatively neutral with little change in deficit levels in the first quarter compared with a year ago.

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Robert Johnson, CFA

Robert Johnson, CFA  Robert Johnson, CFA, is director of economic analysis for Morningstar.

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