In the famous words of Warren Buffet, “be fearful when others are greedy and be greedy when others are fearful”. It would be easy to argue that in January and February 2016, global investors are fearful, and therefore, they should be greedy (or buying stocks, not selling them). Currently, it seems as though oil prices are joined at the hip to the stock market and there is a fixation with a slowing Chinese economy.
Traditionally, when oil prices go up, the stock market goes up; when oil prices go down, the stock market goes down. This is because the market believes the issue with oil prices is demand. Historically, oil prices go down because the economy is slow and there is a low demand for gas and oil. Of course, a slowing economy would generally cause the stock market to go lower. However, in this economic cycle, oil prices are down because of an increase in the supply of oil. The glut in oil, causing oil prices to be lower, is extremely good for consumers and consumer spending.
This is because consumer spending makes up approximately 70%* of GDP (economic growth). Apparently, consumers have been using their windfall from lower gas and oil prices to pay down debt and increase their savings. At some point, consumers will begin to stimulate the economy with their windfall from lower oil prices. Low interest rates and plenty of purchase discounts will further help stimulate consumers to spend.
Keeping all of these things in mind, the big question in the minds of investors currently is: are we experiencing a normal market correction or is the economy slowing down and moving into a new recessionary phase? Because of the economic stimulus to consumer spending from low oil prices, the fact that investors are fearful and not greedy, interest rates are still relatively low, and world-wide central banks continue to be accommodative, it stands to reason we are in a market correction and not on the precipice of a new recessionary phase.
When will this correction end? That is hard to predict but once stock prices have fallen to attractive buy levels, then we will see the stock market detach itself from the movement in oil prices and start to rise on a consistent basis.
If Warren Buffet’s old adage continues to hold true, it may be a good time for investors to get greedy. At a minimum, investors should stay the course, maintain their allocation to equities, and continue their regular savings – especially savings into equities. Dollar cost averaging into things like KiwiSaver and managed funds becomes particularly attractive while prices are lower than what they were pre-Christmas.
Give your Milestone adviser a call if you have any worries about what is happening in the markets.
*The percentage will be different from country to county. The 70% is a rough average of the OECD economies.