Happy New Year? Why would the Chinese market wake up on 4 January and trigger a selling frenzy that would move across the globe impacting every market?
Maybe because it is now the 2nd largest economy in the world growing in excess of 6.0%; a rate that any other nation would gladly embrace. The real question remains, what is the long term impact of the Chinese market on the rest of the world? Does a slower growth rate become a major correction or an adjustment because expectations were too high? For all the criticism China receives from the world markets you would expect a slowing China would be welcomed.
One day does not make an annual return nor does it make a long term investment. Let us take inventory of what we know to be true. We know the 10 year average return of the U.S. market is 6.9% annually. It can experience great highs and equally discouraging lows, but in the longer term view we will see a price return of approximately 4.9% and a dividend contribution of about 2.0%. The smaller capitalized part of the American market has a long term average return of approximately 8.0%.
We also know that Europe has struggled since 2000 with a debt crisis, banking crisis, unification concerns and still averages a contribution of 1.98%. The United Kingdom betters their continental brethren with a slightly better contribution at 2.4%. Traveling across to the other side of the world Japan has struggled significantly through real estate scandals, government tragedies, price fixing schemes, nuclear power meltdowns and a host of other problems and still adds 0.7% annually over a 10 year period. The rest of the developed Pacific performs very well adding 4.9% annually.
China has grown significantly over the past 10 years to the number two economy and averaged growth contributions of 7.3%. It is only rational that as the economy gets bigger the rate of growth will slow. A slow down from an average of 7.3% to 6.3% or even 6.0% remains a significant contributor to overall world growth over the next decade.
When market events take place such as yesterday it is best to reflect on what is happening over the longer view. Otherwise you can get caught up in trying to catch a dogs wagging tail when you need to be looking at which direction the dog’s nose is traveling.
We believe the nose is headed in the right direction. The U.S. is improving on nearly every front and will again experience the benefit of stable energy sourcing and pricing. The long term benefit of energy inde-pendence is almost immeasurable by re-moving one of the most significant re-straining factors on growth.
Europe is addressing the strains of unification and looking beyond debt crisis situations. The problem children of yesterday are growing up and becoming contributing members of the family as Spain, Portugal, Ireland, Italy and even Greece have better futures than just six months ago.
Japan has struggled for decades and over the past 12 months posted the best market return of all developed countries at 6%. The Pacific is benefiting from a release of being constantly dependent on U.S. growth and now equalizing global growth. All of these actions benefit the overall stability of global growth and hold more promise to markets. The growth rate in any one particular country may not match earlier exceptional years, but overall the slower growth may last for a much longer period.
Even with the large correction of yesterday the market remains well within fair value at 96.4% FV. It is well within expectations, using the long term performance of world markets that we will see 18,879 by the end of the year. Two domestic sectors are slightly above fair value. Both Consumer Staples (XLP) and Information Technology (XLK) are slightly above 100.0% FV. Half of the sectors are very close to fair value with values greater than 90.0% FV. Utilities (XLU) takes the lead at 98.0% FV followed closely by Industrials (XLI) at 97.7%. Both of these sectors are showing strong positions in con-tinued recovery. Only one sector is in under-valued territory, Energy (XLE) and we expect to see the sector move much closer to fair value reaching 85% FV by year end.
Today we are showing the beginning year Most Overvalued and Most Undervalued stock list for the U.S. domestic Largecap. Tomorrow we will be revisiting the Watch Lists on both sides for Buys and Sells. Later on this week we will be detailing a forecast for 2016 by taking a longer term view and the basis for our expectations. Happy New Year!