The new year has begun with a shock for investors — with equity markets around the world, as measured by the MSCI All-Country World Index, down 5.4% so far this year (through January 7). Persistent waves of fear over weaker-than-expected economic growth in China and extreme volatility in its stock markets, contagion from rising geopolitical uncertainties in the Middle East and North Korea, and the possibility that the U.S. profit margin story is over have added to volatility and pushed markets much lower. Traditional market catalysts, like cheap valuations and monetary stimulus by central banks, have been replaced by the recent spate of surprising and unsettling events around the world.
Lost in these waves of fear, however, investors may have overlooked strength in the markets' fundamentals, like improving economic and survey data in Europe and signs of rising inflation and stronger consumer spending in the U.S. Also blurred among the negative headlines is a shift from fiscal drag to fiscal stimulus (as reflected in the spending bill passed by the U.S. Congress last month).
We advise investors to be patient and look for encouraging signs — like stabilizing Chinese growth, a bottom in energy prices, and a calming of geopolitical risks — throughout the year.
Learn more in the new edition of Investment Insights, Waves of Fear.