Tahoe-Truckee Market Beat: A contagion risk in the stock market?
January 18, 2016
The stock market is off to one of its worst starts to a year since the Great Depression. There are several reasons for this, but the main story so far this year has been China.
China's economy has been slowing down. They are the second largest economy in the world behind the United States. Their economy is forecast to grow over 6 percent this year, but they are slowing from a 10 percent rate.
There is some fear that their slowdown could spread to other parts of the globe. This type of risk is known as contagion risk, which is defined as risk in one area spreading to others.
Another factor affecting the stock market has been the drop in the price of crude oil. Oil has been falling as the market is getting flooded with supply from countries like Saudi Arabia, the world's No. 1 producer.
The low price of oil has hurt the Energy sector. Some smaller exploration companies with high levels of debt could be facing bankruptcy. Iran will also enter the picture now as the embargo is lifted.
According to a recent article in Bloomberg, some types of crude oil, like North Dakota Sour could actually be worth less than $1 per barrel, due to their high sulfur content and their cost of extraction.
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However, the low price of oil is a benefit to consumers who save at the pump. According to a report from CNBC on Monday, the price of gas has fallen below 50 cents at a gas station in Houghton Lake, Mich.
I wouldn't mind a bit if gas were that cheap in the Tahoe area. Every penny per gallon saved at the pump puts one billion dollars per year into consumers pockets in the US to be used elsewhere.
The stock market goes through cycles of volatility known as "regime changes." According to academic studies, the market spends about 85 percent of the time in a low volatility mode with rising prices. The other 15 percent of the time is spent in a high volatility mode with falling prices.
Funds invested in stocks should be long term money and investors need to be prepared to hold through some periods of high market volatility. Have a sound plan in place and try not to make decisions based on your emotions.
Kenneth Roberts is a Truckee-based Registered Investment Advisor. Information is at his blog at http://www.sellacalloption.com or 775-657-8065. The mention of securities should not be considered an offer to sell or solicitation to buy investments mentioned. Consult your investment professional to understand the risks and/or how the purchase or sale of these investments may be implemented to meet your investment goals. Past performance is no guarantee of future results.