Bank of the West US Outlook Report for January 15, 2016

This was the week for cataclysmic predictions from equity analysts. CNBC was rolling out analysts telling folks to “sell everything.”  Investors should take note of periods of heightened volatility, like we have seen over the last few weeks, and take the opportunity to review their overall investment strategy, current holdings, and make adjustments where it seems prudent. But, chances are, now is not the time to dump everything and head for the hills. Events that require you to “sell everything” happen once in a generation or longer — what market mavens call Black Swan events.  Black Swan events are so far out on the tails of the probability distribution that, for all intents and purposes, they are completely ignored by investment managers.
Still, periods of equity market volatility, like we have seen so far this year, do sometimes precede turning points in the economy, or in economic policy. So is this just another market swoon, or is it a Black Swan?  While I remain concerned about the economic, financial, and policy events transpiring over in China, I am inclined to conclude this is just another market swoon here in the United States.
The U.S. equity market volatility continued this week.  Global equity markets remain on edge.  The VIX index, a measure of stock market volatility, remains elevated at around 28.5.  A more normal range for the VIX is somewhere between 15 and 20. Still, the VIX is nowhere near the levels seen last August, when China surprisingly devalued the yuan, or during the depths of the Great Recession, or even earlier in this expansion in 2011, when the VIX spiked all the way up to 48.0 for a time.
Over a longer time frame, the current equity volatility barely merits an honorable mention in the eyes of the VIX. But blaring headlines of impending recession and “sell everything” makes for better ratings and sells more newspapers.
What should be of greater interest to longer-term investors than the daily gyrations of the market is what fundamental drivers might be behind the recent sell-off. It appears to be fears of a China economic hard landing and devaluations leading to a full-blown global recession that could pull the U.S. economy down as well.
Economic data in the Eurozone and Japan are generally outperforming economist expectations.  True, emerging market economic indicators have turned more negative over the past month, but it’s the U.S. economic data that has missed the mark by the widest margin.  While this global economic picture isn’t very flattering, it’s also not a global economic doomsday, either.  The truth is somewhere in between — a mixed and messy picture.
To find out more, check out this week’s US Outlook Report.
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