The S&P 500 declined 2.5% today, bringing its year-to-date decline to 7.5%: the worst start to a calendar in for U.S. stocks ever.
We expect a challenging and volatile capital markets environment in 2016, as investors assess risks that include economic weakness outside the U.S., ongoing commodity price weakness, concerns regarding excessive debt, and a persistently strong dollar and persistently low interest rates.
Equity valuations are starting to become more attractive as stock prices fall, but as 2008 showed, just because the price of an asset is “cheap” doesn’t mean that the price will necessarily stop going down in the short run. That said, continued material stock price weakness from current levels should create attractive long-term valuation opportunities for patient, opportunistic investors to deploy capital in great companies.
Fourth quarter earnings season starts in earnest this week; corporate earnings reports will provide both insight into how our companies did late in 2015, and more importantly, how company managements view the outlook for 2016. We will update this blog with earnings report highlights over the next several weeks.