If you’ve been paying attention to the financial headlines lately, you may have been reconsidering your investment strategy. With global markets in a rout and domestic indexes seeing flat growth or worse over the last year, investors are likely getting antsy as the new year begins, much to the frustration of their financial advisors. While fortunes of doom and gloom prevail over global markets, there is a strong argument that another recession is not actually on the horizon.
To prove a point that hard times are here yet again for the American economy, economic naysayers point to a confluence of factors that, historically, have preempted a recession. As The Wall Street Journal reported, these factors include industrial production, corporate profits and the overall stock market.
Industrial production, which represents the total output from mines, factories and utilities, has been struggling, according to recent data. The Wall Street Journal noted that much of this involves the current strength of the U.S. dollar and the relative weakness of economies abroad. In the decades since World War II, major economic recessions have almost always followed a decline in industrial output. But The Wall Street Journal further noted that much of this current slump involves oil production. Oil is selling at historic lows at present, prompted by low demand and high supply. This is also likely weighing on corporate profits and therefore, stock prices, of which oil producers like Exxon Mobil, Chevron and Valero are a major player.
The bright side
All of this would be more troubling if consumer confidence was also falling, which it has not been, according to Bloomberg. This is reinforced by a currently strong job market, which is seeing its lowest unemployment rate and highest number of new jobs created in years. It’s these figures that prompted Bloomberg to rate the probability of a 2016 recession at only 16 percent. They qualified this by explaining the relationship between market volatility and the health of the overall economy.
“The market may have some digestion problems, but I think over the course of the next year we’ll see a higher market, global GDP is going to be around 3 percent, maybe not as high as the IMF sees but I’m not that worried,” BlackRock executive Laurence D. Fink told Bloomberg. “I believe this is a capitulation, not a bear market.”
Large corporations have more exposure to global markets, which has greatly influenced the poor performance in the equity market as of late. The serious drop in the price of commodities, primarily crude oil, has left many reeling, prompting some personal investors to head for the exits. But individual investors needn’t worry too much about another recession anytime in the near term, according to the analysis of many economists.
With this information in mind, it’s important that financial professionals keep their clients’ emotions in check. Poor market performance always makes for an attention-grabbing headline, but only rarely does it spell widespread turmoil for investors. Financial professionals would do well to ensure their clients that overall, the economy isn’t in terrible shape, given strong consumer confidence and a resilient job market. Instead, personal investors should remind themselves of their long-term goals, which are typically not conducive to following the swings of the global markets. Take this opportunity to encourage clients to keep their retirement planning in perspective, and always remember to prioritize the long haul over the short gain.