In Chinese culture, red is the color of good luck. Long ago, it was believed that this bright color could fend off evil spirits and bad fortune, so to start off a new year people would dress in red, hang red lanterns, and put up red scrolls on windows and doors. While the Year of the Monkey has just arrived in February, global financial markets have already seen a lot of red in 2016 so far.
Brace for a wild ride
With a sharp rise in volatility, stocks had the worst ever start to a year. The selling—overdone in our opinion—is a culmination of circumstances that have been troubling investors for some time now: a yearlong collapse in oil prices, a slowing China, and global growth and inflation failing to pick up year after year. As oil prices sank to a decade low, we think it’s a function of oversupply, not a signal of an ailing world economy. China comes off of its slowest growth year in a quarter century in 2015, though the latest data suggest that chances of a hard landing are low. More abrupt market swings are probably ahead, but to us the present downturn looks more like another painful but temporary correction than the beginning of a bear market.
Red envelopes from central banks
In this setting, central banks are under pressure to make monetary policies more accommodative. The Federal Reserve (Fed) might take more time before its next interest rate hike, while the European Central Bank (ECB) hinted at more stimulus. But the biggest surprise came from the Bank of Japan (BOJ), which took rates for excess reserves below zero for the first time, sending the country’s 10-year government bond yield briefly to negative levels.
Places to find good fortune
Jitters abound in stocks and high yield debt, and investors retreated to safe haven assets. We still like Japanese and European equities. It could also help to consider quality and minimum volatility strategies, but stay cautious with momentum and defensive sectors.