If you were to watch the news, you’d think someone forgot to wish the stock market a Happy New Year. After all, the Dow® is off to its worst start since 1991.
Of course, that’s not really the reason. But it’s true that 2016 hasn’t started well as far as the markets are concerned. If you’ve seen the headlines, you know that the Dow has fallen, the S&P 500® has fallen, the price of oil has fallen … and if you’ve really paid attention, you know the Chinese stock market has fallen hardest. All this can be very unsettling to investors. Many are asking me: “Does this mean we’re in for a bad year? Is a bear market just around the corner? Should I buy, should I sell, should I hold?”
I’m a big believer in starting the year off on the right foot. For that reason, I want you to know why exactly the markets are behaving this way. Most of all, I want you to understand what you can do about it. That way, secure both in knowledge and intent, you can get your 2016 off to a good start regardless of how the markets are doing.
The New Year: a Lot Like the Old One
If you think about it, the very concept of a “new year” is kind of arbitrary. There’s really nothing different about January compared to December. All that’s changed is that the Earth is in a slightly different position around the sun.
That’s why it should come as no surprise to learn that the current market drama is merely a continuation of last year’s storylines. In this case, the two culprits are a pair of familiar characters: China, and oil.
Let’s take oil first. Contrary to popular belief, the price of oil is not controlled by a single person or organization. Actually, oil prices are dictated primarily by the law of supply and demand. You probably remember this from your Economics 101 class: when the demand for oil is greater than the supply, the price rises. Conversely, when the supply of oil is greater than the demand for it, prices drop.
For some time now, the supply of oil has been far greater than the demand for it. There are simply so many countries around the world drilling for oil—think Saudi Arabia, Russia, Nigeria, Canada, and the United States—that the world has a glut of the black stuff. In fact, this surplus is likely to increase in the near future. Because many of the sanctions long-imposed on Iran are being lifted, Iran’s own supply of oil is poised to flood the markets very soon.
Meanwhile, the demand for oil is actually decreasing. Many countries that normally buy oil (China is the big one) are experiencing hardships of their own, meaning they have less money and even less need for fossil fuels. Thus, too much supply and too little demand makes for falling oil prices.
I mentioned before that no single person or entity controls the price of oil. However, there are some things oil producers can do to influence said price. For example, if one of the major oil-producing regions were to cut down on production, that would decrease supply. But here’s where geopolitics comes into play. The biggest producers, like Saudi Arabia, are refusing to cut back. Their reason? If oil prices were to rise, that would only serve to benefit their competitors, especially Russia and Iran, who need higher prices to turn a profit. Saudi Arabia, on the other hand, can survive on lower oil prices because of their massive cash reserves, and because extracting oil is far less costly for them. In the end, lower prices harm their competitors more than it harms them, allowing them to dominate the market.
So that’s why oil prices are so low—but why do oil prices affect the markets? It’s a good question. After all, lower oil prices mean lower prices at the gas station, which is a good thing for consumers. If nothing else, it means more money to spend … or invest!
Unfortunately, when the price of oil falls, it takes everything dependent on oil prices with it. For example, falling oil prices makes life harder for energy companies and companies closely aligned with the energy industry. The result? Falling stock prices, which leads to market volatility as a whole. Then too, the decline in demand for oil paints a somewhat worrying picture about growth around the globe. While a decreased reliance on fossil fuels is probably good for the world’s environment, it doesn’t say good things about the world’s economy.
It’s hard to predict what will happen to oil prices moving forward, but most analysts believe they will continue to remain low. Watch this space … or better yet, keep an eye on what you pay at the pump.
It’s the Year of the Monkey according to Chinese astrologists. I don’t know much about astrology, but a quick search on Google reveals that such a year is supposed to herald challenge and competition.
For China, “challenge” is the key word.
It started in June of 2015. At the time, China’s stock market was on an incredible hot streak. With the state-owned media urging them on, many people started pouring their money into stocks. The resulting growth was explosive but unstainable. As the demand for stocks increased, so too did stock prices. That didn’t deter investors, who kept buying as long as stocks looked like they would keep going up.
Meanwhile, the overall Chinese economy had actually been slowing down, and, despite its size, was in fact relatively weak in terms of growth. Debt skyrocketed, and investors awoke to the fact that their nation’s economy wasn’t an effective prop for their nation’s markets. This sudden loss in confidence led to a sharp drop in their stock market, which in turn upset markets here at home.
The Chinese government threw the tub, toilet, and kitchen sink at the problem, trying to stop losses. For the most part, their efforts worked. The volatility calmed down toward the end of last year. But even as the market storm subsided, the economic one continued. Because China has been gradually shifting from a manufacturing-based economy to one based more on spending, growth has slowed significantly.
To combat this trend, China has allowed the value of its currency, the renminbi (sometimes known as the yuan) to weaken. This makes it easier and cheaper for Chinese companies to export their goods. But it also brings negative consequences. In this case, it hurts the very stock market the government tried so hard to bring under control.
You’re probably wondering, “Since China is so far away from here, why does it matter to us what goes on there?” The answer is that we live in a global, interconnected world … with the resulting global economy. While countries might separate themselves with boundaries, walls, languages, and currencies, money is allowed everywhere. We invest in other countries, buy products in other countries, loan money to other countries (or apply for loans, as the case may be) and even send our businesses to other countries. The ripples near one shore are always felt near the other.
In the vast network that is the global economy, China serves as an extremely large hub. That’s why China’s problems don’t just affect China. They affect everyone who does business with China. When China’s manufacturing suffers, the countries that export raw goods suffer as well. Furthermore, when China’s currency weaken, it means buying less oil and fewer machines and cars from the countries who rely so much on exporting to China.
All this causes stress—on governments, economies, businesses … and by extension, the markets.
So those are some of the reasons for the recent market volatility. But the question remains: what can we do about it?
The answer is quite simple: nothing. As you can imagine, the price of oil, or the future of the Chinese economy, are simply out of our hands. The same is true for how the markets react.
And you know what? That’s okay.
There’s a saying that you should never worry about what you can’t control. That’s good advice. But even better advice is to remember that while we can’t control what the world does, we can control what we do. And in this case, there are actually lots of things we can do to influence our own financial fortunes. To get the year off to a good start.
Financial Resolutions for 2016
As you know, this is the time of year for setting New Year’s resolutions. While most resolutions center on shedding a bad habit or picking up a new skill, I’d like to suggest a few financial resolutions you can try. I’d like to claim credit for them, but that honor goes to someone else: Benjamin Franklin.
Franklin, as you know, was one of the most intelligent and accomplished Americans of all time. A successful inventor, a thoughtful scientist, a leading politician, a skilled chess player—Franklin could do almost anything he set his mind to. He was also an excellent writer. Fortunately for us, many of his writings centered on the subject of personal finance. He even wrote a book called The Way to Wealth, and it is from this that we can draw the following resolutions. Here are some of Franklin’s tips and warnings, along with my comments. All are simple, easy, and time-tested.
Beware of little expenses; a small leak will sink a great ship.
While it may not be fun to watch the markets drop, remember that the markets aren’t the only source of wealth. This year, a good resolution would be to focus on identifying and eliminating all those little, unnecessary expenses that put a drain on your finances.
Buy what thou hast no need of, and before long thou shalt sell thy necessaries.
One of the easiest ways to erode our wealth is to fall prey to our emotions. That’s because it’s our emotions that lead us to things like impulse buys, or vanity purchases. Keeping our emotions in check—and reining in our spending—can in the long run be more valuable than the hottest stock. The resolution: buy only what you need or what you really want the most. Not what you only want right now.
Think of saving as well as of getting: the Indies have not made Spain rich, because her outgoes are greater than her incomes.
A big part of financial planning is managing your cash flow. Cash flow, of course, is the money you have coming in versus the money you have going out. In this case, a good resolution would be to improve your cash flow by identifying all your sources of income and all your expected expenses. Once that’s done, I can help you find ways to increase the former and reduce the latter.
For age and want, save while you may; No morning sun lasts a whole day.
It’s never a bad idea to commit to saving more, especially during times of market volatility. While your investments are there to help you grow your money for the future, your savings are there to help you ensure life’s storms never catch you without an umbrella. The resolution: commit to saving more of your income on a regular basis.
A great number of people were collected … conversing on the badness of the times, and one of the company called to a plan, clean old man. “Pray, Father Abraham, what do you think of the times? Won’t these heavy taxes quite ruin the country? How shall we ever be able to pay them? What would you advise us to do?” Father Abraham stood up. “Friends,” said he, “the taxes are indeed very heavy … but we have many others, and much more grievous to some of us. We are taxed twice by our idleness, three times as much by our pride, and four times as much by our folly, and from these taxes the commissioners cannot ease or deliver us by allowing an abatement. However, let us hearken to good advice, and something may be done for us: God helps them that help themselves.”
This is a time for New Year’s Resolutions. A time for deciding what we want to make of ourselves this year. A time for deciding what we want the year to be. And in my experience, when we focus on those things, when we try to improve ourselves, something very unexpected and fortunate happens:
Our finances improve, too.
Whatever the markets have in store for us this year, remember this: we control ourselves. We choose our own destinies. We set our own goals. So as the pages of your calendar turn, remember that my team and I are watching the markets carefully. We’ll let you know the moment any action is required. In the meantime, focus on your day-to-day life. Focus on what you can control. Focus on your own happiness.
That is the Way to Wealth.
I hope you found this article useful. If you have any questions about the markets or the global economy, or if there’s anything I can do to help you reach your own financial resolutions, please don’t hesitate to let me know.
My door is always open.
Happy New Year!