Market Update

Perspectives on the Market’s Volatility - January 7, 2016

January 07, 2016

Financial markets have had a difficult start to 2016 to say the least. Similar to last August, the proximate cause for the market swoon has been a weakening of the Chinese currency, which in theory is pegged to the dollar. Monetary authorities in China, who are in the process of opening up their economy and financial system, have had little choice but to ratchet the peg lower due to slowing economic growth or risk being overwhelmed by market forces.

These abrupt adjustments have caused turmoil in Chinese markets and beyond. However, from a U.S. standpoint, similar to our view last summer, the effect on our economy should be rather muted. U.S. exports to China, while not insignificant, are under 1% of GDP and given their essential nature are likely to hold up reasonably well. However, there is little doubt that energy and commodity producers continue to be hurt by the China slowdown.

On a positive note, while the dollar has strengthened against the Chinese Yuan, it has failed to rally against other major currencies. Both the Euro and Yen have performed surprisingly well yet again suggesting these highly important struggling economies may be turning the corner. Furthermore, while the availability of credit to corporate issuers is a concern, longer term Treasury yields are falling and it is quite clear that while the Federal Reserve has embarked upon a tightening regime, this is shaping up to be the most gradual tightening cycle in memory.

Entering 2016, our view was that the U.S. equity market was trading close to fair value. Given that Chinese weakness should have at most modest impact on our economy, our expectation for moderate GDP growth driven by the consumer remains intact. In fact, the consumer should continue to benefit from solid job creation, rock bottom energy prices, and low mortgage rates. The current market dislocation presents an opportunity to identify and purchase attractively valued stocks and strengthen portfolios as a result.

The views and opinions expressed above are those of Washington Trust Investments and are subject to change without notice based on market or other conditions.

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