As the market tumbled through the month of January, analysts and the financial media scrambled to explain it. The falling stock market and weak economy in China was given a lot of attention and credit for our own stock market’s decline at the beginning. The International Monetary Fund reported the Chinese economy grew 6.8%. Down from the prior year but still three times the growth rate of the U.S. economy. The Chinese stock market had recovered by the end of 2015 to post a total return of 12.6% as measured by the Shanghai Composite Index.
Falling oil prices has also been mentioned as the reason for the stock market’s poor performance at the beginning of the year. Oil fell from over $90 per barrel to $38 per barrel in 2015. The sharp decline caused the average price per gallon of gasoline to fall to $2.00 for the first time in several years. You would think that falling energy prices would be good news for everyone, except those in the energy industry. Especially since the rapidly rising oil prices from a few years ago were also supposed to be bad for the stock market. It would seem no matter which way oil prices move it’s bad for the stock market.
What should smart investors take from this? Remember that economies and markets all have their cycles and the catalyst that triggers the change is impossible to predict. The good news is that the record for coming out of cyclical downturns is very good. Downturns have historically been where the greatest bargains have come from. Volatility is an outward manifestation of fear and greed. Warren Buffett advised, “Be fearful when others are greedy and greedy when others are fearful.”