Market volatility expected to continue this year

Markets around the globe felt the aftershocks of China’s shortest trading day of 2016 when new circuit-breaker measures were triggered Jan. 7 for the second time during the first full week of the New Year.

Although some market volatility is expected to continue as the year progresses, local financial management professionals don’t anticipate significant impacts to the U.S. economy or to the average investor.

While Hong Kong’s Hang Seng Index, which includes the sub-indices of commerce and industry, finance, utilities and properties, initially began 2016 with an adjusted close of 21,327 on Jan. 4, the index fell by Jan. 7 to an adjusted close of 20,333. The Shanghai Shenzhen CSI 300 Index closed Jan. 4 at more than 3,469 but had dropped by Jan. 7 to an adjusted close at 3,294.

Charles Zhang, founder and managing partner of Zhang Financial, said the circuit breakers in the Chinese markets are triggered if an index rises or falls 5 percent, which then calls for a halt in trading for 15 minutes.

“They have limitations for the stock market of up 10 percent or down 10 percent for the individual stock, and they will stop trading,” said Zhang. “They added a new rule, a 5 percent and a 7 percent rule. If it drops by 7 percent, trading stops for the rest of the day.”

On Jan. 7, trading was halted after only 29 minutes, which included a 15-minute stoppage when shares fell 5 percent before reaching the 7 percent closing threshold.

In the U.S., the Securities and Exchange Commission in 2012 approved market-wide circuit breakers to call for a 15-minute halt in trading when the S&P 500 drops both 7 percent and 13 percent, and then a complete stop for the rest of the day at 20 percent, according to Zhang.

The Dow Jones Industrial Average opened Jan. 7 at 16,888 and fell 2.2 percent to close at 16,514 by the end of the trading day; the S&P 500 opened at 1,985 and declined 2.1 percent to close at 1,943.

Other markets, such as the London Stock Exchange’s FTSE 100, opened at 6,073 and dropped 1.9 percent to close at 5,954, and the Japanese Nikkei 225 opened at 18,139 and fell about 2 percent to close at 17,767.

“The market went back a little bit because they suspended the new rule,” said Zhang in reference to China’s decision regarding the circuit-breaker mechanism for Jan. 8 trading.

Laina Mills, senior portfolio manager at Grand Rapids-based Legacy Trust, said the market activity during the first week of the month was interesting to watch.

“We saw once they removed those automatic circuit-breakers, the market actually calmed quite a bit overnight,” said Mills.

She also said, while there is no question China’s economy has been slowing, the good news is the country continues to expand at a relatively high rate.

“It still has some time, maybe several years, to play out,” said Mills. “This is going to be a story for a while, but as long as the U.S. and the other developed countries can kind of continue with the slow and steady growth, and as long as China’s policy makers can avoid that hard landing everybody talks about where it kind of gets away from them, we should be all right.”

Zhang said markets and economies are two different things, and since the U.S. economy is measured by Gross Domestic Product and only 7 percent of U.S. exports go to China, the nation should feel less of an impact from Chinese markets than other countries.

“I would like to make the point that the Chinese market is important — it definitely impacts the U.S. — and they are very volatile, but we do not believe it will have significant impact on the U.S. economy,” said Zhang. “Compared with other countries like Australia, which is 29 percent (export trade), and some of the OPEC members like Iran is 34 percent — they would be more affected by China’s volatility.”

Although the Chinese market is down significantly in comparison to its high water mark, Zhang said the Shanghai Composite Index had a return of 9.4 percent last year as of Dec. 31, while the Dow Jones had a return of about -2.32 percent.

“A lot of people don’t know that, and I heard about everybody saying, ‘I lost so much money in China,’ but if you bought at Jan. 1, 2015, to Dec. 31, 2015, you still made 9.4 percent with the index,” said Zhang. “Three years of return was at 55.97 percent, and the U.S. three-year (return) was 32.97 percent.”

Zhang also noted China’s economic growth has been slowing since 2010, and the Chinese yuan has been devalued.

“The currency in China is down a lot; it is down almost 6.5 percent within a year,” said Zhang. “I think that is probably a major concern if you have an import or export, or have a business in China.”

The current middle rate for the Chinese yuan is at 6.56 against the U.S. dollar, according to the People’s Bank of China. While Michigan-based companies looking to buy products from China may profit from manufacturing goods using cheaper parts from China, companies trying to sell their products to consumers in China may experience a decrease in demand, according to Zhang.

“That is probably a major concern, but for the average investor, people who live here in Southwest Michigan, diversification is extremely important and (you have) to watch your cost for investment,” said Zhang. “A lot of times, people buy really expensive products for the investment. So you need to watch and make sure you have low-cost investment and are looking for the buy opportunity.”

Mills, who primarily serves individuals and families in the West Michigan region, said Legacy Trust does advocate for global diversification in portfolios since it makes a lot of sense as a U.S. investor and due to the strength of the economy.

“It certainly makes sense to have a majority of our assets in the U.S., but I do think that global diversification is important in today’s economy with the lines kind of getting blurred with how things are interconnected today,” said Mills.

She also pointed out the importance for investors to plan their cash flow needs for at least one to two years, especially with the expectation of continued market volatility in the future.

“I do think that some of this volatility is unfortunately going to be more normal this year. I think it is going to happen again,” said Mills. “We are going to continue to see this kind of up and down. It is really important for investors to make sure they have the right mix of how much of their assets are invested in stocks so the money can stay invested.”