On Monday, the Dow Jones Industrial Average dropped by 331 points to 17,501–but that’s only 602 points–or 3.33%–below the record level of 18,103 that it touched (but didn’t close at) this past December 26. All of the major stock indices have declined, as well. Bond markets are also trying to establish a direction for the New Year. Remember that, although the markets have been open for a couple of days in 2015, the various participants are probably still trying to get rid of the cobwebs–and back in action.
Whenever we transition into a New Year, various market pundits try to get their name “up in lights”. For the most part, however, the recent activity has been merely “noise”. Over the past ten days, or so, trading volume has been quite low due to the holiday/vacation season. So any market actions–good or bad–would have limited meaning for the New Year.
At this point (1:20 AM) on Tuesday), any prognostication should be taken with the proverbial grain of salt. A key ingredient in this confusion is the fact that oil has dropped by 50%, just since July. Lower oil prices generally mean that consumers tend to have a bit more spendable income, which could enhance the economy. Also, corporations that rely on oil-based ingredients for their production, would benefit. At the same time, the DJIA and the S & P 500 Indices are capital-weighted, meaning that the lower revenues of companies like Exxon-Mobil and Chevron-Texaco would place downward pressure on each index.
There are still a number of other influences within the global economy, which can only be understood as they work their way through the markets, the various economies and, in some cases, compete with each other. The OPEC nations intend to continue to produce oil at current levels with the intent of causing the upstart U.S.-based “fracking” companies to become cost-ineffective at current lower prices. If that strategy is successful, it could eventually raise the price from current levels.
At present, the Global Economy is quite weak, which only further reduces the demand for–and price of–oil. But, over time, as these elements work themselves through the marketplace, who knows what will happen in, say, three-to-six months?
Inflation is virtually non-existent, as most economies are more concerned with the lower prices that deflation can bring. Other than the U.S., most central banks are definitely in a stimulus mode, trying to jump-start their respective economies through lower interest rates.
Also, will there be further international crises, which might influence the current global situation? Consider: what would happen if Fidel or Raul Castro dies; civil war in one or more countries in the Middle East; regime change in a politically unstable country; or widespread national catastrophes that could wreck havoc on whole regions of the World. I realize that some of these events are hardly anticipated; but, so was the Arab Spring in Egypt, in December of 2010, or the combination earthquake/tsunami/nuclear melt-down at the Fukushima Daiichi reactors in Japan, in March of 2011!
So, now is the time to go back to basics. For instance, is your portfolio expected to help finance your retirement? Are your goals long term? Is it balanced between: stocks; bonds and cash? Do you have the stock component spread among a number of industrial sectors, such as: utilities; health care; consumer staples; technology; etc? Have you included some overseas stocks, including developed and developing markets? Are the bonds diversified between different categories, such as long and short-term, governments, corporates and, perhaps, global? Will you be using some money for gifting to Children or Grandchildren? You may not have checked every box on this portfolio composition list; however, a fair amount of diversification is quite important!