Home' Trinidad and Tobago Guardian : January 24th 2015 Contents JANUARY 24 • 2016 www.guardian.co.tt SUNDAY BUSINESS GUARDIAN
STOCKS | SBG13
Allianz strategist Hooper
on market turmoil
Why global woes, sinking stocks don't mean US recession
Last year was the stock market s first down year
since 2008, and this year has opened with a thud.
The market is down eight per cent in the first two
weeks of trading, the worst start to a year ever.
Kristina Hooper, head of US capital markets research and
strategy for Allianz Global Investors, says investors shouldn t
panic, but they can take steps to navigate the market s perils.
Her answers have been edited for clarity and length.
Given the turbulence in the stock market, should
investors be worried?
The quick answer is they should be cautious, but they
shouldn t be worried.
Did the Federal Reserve s decision in December to
raise its benchmark rate for the first time in nearly a
decade play a part in the market s volatility?
Absolutely. We are living through monetary policy history
being made. What we are seeing now is an unwinding of
incredible conditions in monetary policy in the United States.
So it stands to reason that we are going to see a lot more
volatility as the Fed normalises.
What headwinds do you see facing the economy?
The Fed tightening is one. Historically, stocks are hurt out
of the gate with Fed tightening. But typically, stocks are able
to recover and post more positive gains over the longer term
because tightening usually coincides with an improving econ-
omy, which is normally a good thing for stocks.
But we do have other headwinds such as geopolitical risks.
We have seen signs of that with a flare-up in the Middle East
with Iran, Saudi Arabia and other countries. Our view is what
is going on with China is not cause for panic, but it certainly
is a cause for caution.
What stock-market sectors do you think will do well
We would focus on those sectors that look attractive from
a valuation perspective and earnings and, even more important,
from a revenue-growth standpoint. Certainly, the technology
sector has been able to deliver in terms of revenue growth.
Health care could be another area. The aging population is
a great secular trend.
What about the energy sector, which had the biggest
drop in 2015?
Energy company stock valuations look attractive. But until
we get greater visibility over what the catalyst might be to
drive oil prices higher and sustain them, we need to be cau-
Do you see investment opportunities overseas?
Yes. One important playbook to think about is the accom-
modative central bank playbook. It certainly benefited the
United States, and it is currently benefiting European stocks
and Japanese stocks. And valuations look attractive in Europe.
Should investors think about dividends?
Absolutely, particularly given our view that volatility will
be increasing. Dividend-paying stocks have historically offered
significantly lower volatility than the overall market. In an
environment of muted returns, dividends will play a very
important role. Dividends can make the difference between
a negative or flat return and a slightly up return. AP
Last week s harrowing plunge in US stocks---fueled
by economic fears about China and plummeting
oil prices---left investors anxious and alarmed. Some
wondered if it signaled an approaching recession
in the United States.
The answer, most analysts say, is no.
The American economy is expected to prove resilient and
nimble enough to avoid serious damage, at least anytime soon.
For all the economy s challenges, the job market is strong, home
sales are solid and cheaper gasoline has allowed consumers to
spend more on cars, restaurants and online shopping.
The companies that make up major stock indexes are far more
vulnerable than the economy itself is to distress abroad: Companies
in the Standard & Poor s 500 index derived 48 per cent of their
revenue from abroad in 2014, up from 43 per cent in 2003.
By contrast, exports account for only about 13 per cent of the
nation s gross domestic product---the broadest gauge of economic
output. That s one of the lowest such shares in the world. Exports
to China equal just one per cent of GDP.
"While the US economy s exposure to China is relatively small,
the multinational companies that trade on the stock market are
much more exposed," said Mark Zandi, chief economist at Moody s
The S&P 500 sank 2.2 per cent Friday and has tumbled 8.0
per cent since the year began, deflated by expectations of even
lower oil prices ahead and fears that China s once-explosive econ-
omy is slowing more than anyone had expected. On Friday, the
Xinhua news agency reported that Chinese banks reduced loans
last month from a year earlier.
It was the latest sign that China s economy continues to decel-
erate; an ominous trend for US companies, like heavy-equipment
maker Caterpillar, that have significant business there.
"For many of these companies, the narrative behind their
growth and earnings prospects is China," Zandi said. "If you
throw that narrative out, investors get nervous."
The disconnect between the actual economy and the price of
stocks isn t new. From the waning days of the Great Recession
into the tepid recovery that followed, stocks managed to gradually
rise despite persistently high unemployment and tepid economic
growth. Now, the opposite seems true.
"Main Street is better, and Wall Street is suffering," said Jim
Paulsen, chief investment strategist at Wells Capital.
The broadest gauges of the economy look fundamentally sound.
GDP likely expanded 2.4 per cent last year, according to JP Morgan
Chase. Zandi foresees its growth hitting 2.8 per cent in 2016 ---
hardly spectacular but decent, especially at a time when many
industrialised economies are struggling to grow at all.
The job market appears particularly robust. Employers added
an average of 221,000 jobs a month during 2015 and 284,000
a month from October through December. The unemployment
rate has sunk from 10 per cent in 2009 to five per cent, a level
associated with a healthy economy.
Improved job security---layoffs have slowed to exceptionally
low levels---has helped embolden many Americans to shop. Con-
sumer spending, which drives about 70 per cent of US economic
activity, rose at an annual rate of more than three per cent in
the spring and summer. Auto sales hit a record last year.
Not that the US economy has been left unscathed by the
weakness abroad. Partly because a stronger dollar has made their
goods more expensive abroad, US manufacturers are suffering.
Industrial production fell in December for a third straight
month, the government said, and orders to factories dropped in
November for the third time in four months. Last year, factories
added just 30,000 jobs, the fewest since the recession year of
What s more, energy companies are reeling from sharply lower
oil prices. And though falling oil prices have helped boost consumer
spirits and encourage spending, they also helped slow the overall
economy last year by causing energy companies to slash investment.
In addition, the Federal Reserve has signaled that it expects to
further boost interest rates this year after raising them from record
lows in December, and some fear it will move too fast. Fed hikes
were considered a trigger for three of the past four recessions.
Economists don t entirely understand the links among the
world s major economies. The International Monetary Fund has
acknowledged surprise over just how much China s slowdown
has hurt other countries in the developing world.
It s also possible that damage to the United States could prove
worse than direct trade ties suggest. Wells Capital s Paulsen notes
that small- and medium-sized US companies supply the multi-
nationals that do big business overseas. When exports falter,
those companies can suffer in ways that don t show up in trade
Tumbling stock markets themselves can also cause economic
damage, by making Americans who have money tied up in stocks
feel poorer and less inclined to spend.
A month ago, Joel Naroff, president of Naroff Economic Advisors,
predicted that the US economy would grow three per cent this
year. Now he s considering cutting his forecast. He s not worried
about the impact of economic weakness overseas. He s worried
about the toll that falling stocks may take on consumer confidence.
Still, he doesn t think a recession is coming, no matter how scary
the stock plunge of late.
As famed economist Paul Samuelson once quipped, "The stock
market has forecast nine of the last five recessions." AP
In this undated photo provided by Allianz Global Investor,
Kristina Hooper, head of US capital markets research and
strategy for Allianz Global Investors, poses for a photo. The
market is down eight per cent in the first two weeks of
trading in 2016, the worst start to a year ever. Hooper says
investors shouldn't panic, but they can take steps to navigate
the market's perils.
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