Nobody wants to say it out loud—BUY!—but there’s certainly a lot of murmuring on Wall Street about opportunities for investors as financial markets careen lower and lower.
The gloom from January has carried into February, with the S&P 500 index down more than 10% so far this year. Investors increasingly worry that a recession may be forming, with the Federal Reserve more handicapped than usual because interest rates—the typical antidote—are already so low, with virtually no room to cut. Weak GDP growth from the end of last year, combined with soft earnings reports, have created a “buyer’s strike” in markets.
Even so, it remains difficult to see what, exactly, would cause a full-blown recession, while there are plenty of reasons to think it won’t happen. For those looking to feel better about the big market selloff of 2016, here are 5 reasons for optimism:
What causes recessions isn’t happening now. In the past, recessions have been caused by major policy mistakes at the Federal Reserve, soaring oil prices, or bursting bubbles in large parts of the economy. At the moment, the Fed is at the very beginning of a gradual tightening cycle, and while Fed policy is controversial, there’s no evidence of a mistake. Oil prices are obviously falling rather than rising, and while there could be bursting bubbles in energy or tech, those sectors aren’t nearly as big as the subprime debacle in the housing sector, which triggered the last recession.
U.S. exposure to China is minimal. The slowing Chinese economy is obviously a worry for investors. But exports to China account for less than 1% of U.S. GDP, few Americans hold shares in the turbulent Chinese markets, and other direct linkages are modest at best. Besides, most of the damage in China may already be done. “The feared ‘hard landing’ has already happened, from the perspective of global trade and markets,” Bank of America/Merrill Lynch economists wrote recently.
U.S. companies are getting more efficient. They’re rapidly adopting new technology to lower costs, as topline revenue growth becomes scarce. Energy firms in particular are learning how to break even at lower energy prices. Cathie Wood, CEO of ARK Invest said , that large companies are rapidly liquidating inventories, which could lead to a spending spurt later in the year. “We’ll have a whip in earnings.” she said. “That’s going to be the biggest surprise out there, and that’s what is going to sustain this market.”
Consumers are in good shape. Economists keep fretting that spending isn’t going up — but saving is, with the savings rate ticking up from 4.8% back in 2014, when oil prices were over $100 per barrel, to 5.5% now. So some of the savings from cheaper energy is going straight into the bank. Home values are rising too, making middle-class home owners better off. And the percentage of income required to pay household debts has dropped from 13.2% in 2007 to 10% now. Even if consumers aren’t buying the same amount of stuff they used to buy, they’re in much better shape financially than they have been in years. That doesn’t bode for a recession.
Stocks are reasonably priced. Citi’s “valuation bull’s-eye” puts the value of S&P 500 stocks in the second-most favorable range, with a price-to-earnings ratio between 14 and 16 times earnings. On average, the index has returned 13.3% during the next 12 months when trading in that range. In general, stocks aren’t cheap on a historical basis, but they are reasonably priced given that the economy is still growing.
It goes without saying there’s a lot that could go wrong, since that’s the unpredictable world we live in. One complication of markets this year has been unusually complex interplay between China’s not-quite-mature financial markets, exchange rates that are not quite free-floating, a generally slow-growing global economy and very unfamiliar dynamics in commodity markets, especially oil. But confusion isn’t the same as catastrophe, and the markets could promptly decide the risks aren’t that severe after all. They overshoot in both directions.
Rick Newman