Mellody is President of Ariel investments, a Chicago-based money management firm that serves individual investors and retirement plans through its no-load mutual funds and separate accounts. Additionally, she is a regular financial contributor and analyst for CBS News.
Skip: There were some jitters on the markets last week. You are here this morning to help us get our heads around why, right?
Mellody: That’s right! In early December, investors were bullish and the markets had been flirting with records – the Dow was looking at 18,000. But last week was a bumpy one across all of the indices, from the S&P 500, to the NASDAQ. This has caused some people to wonder whether we are looking at a downturn, so this morning I want to walk people through what is going on.
Skip: That sounds great! So, why did the markets experience turbulence last week?
Mellody: Well, Skip, the big story last week were the growth numbers out of emerging economies, especially the BRIC countries – Brazil, Russia, India and China. All of these economies have been cooling more than expected. Of course, the big story here is China. China is now a prime mover in the global economy, so what happens in China ripples around the world.
The data that has emerged from Beijing over the course of the last two weeks show that the country’s growth is coming down in a big way. China’s GDP growth clocked in at 6.91% in October year over year, the third straight month below 7% and the weakest stretch since the start of 2009. The countries exports and imports underperformed expectations as well, and the housing sector is slumping.
All of this combined definitely has investors on edge.
Skip: So slower growth in developing countries is partially to blame. Is there anything else?
Mellody: The second piece of the story is commodities, such as oil, gold, aluminum and copper. The markets generally consider commodity prices, particularly the price of oil, to be indicators of growth, and falling prices a signal of weak growth. As you know, oil prices have come down significantly – nearly 40% in the past 6 months. Now part of it is due to demand in developing markets like China. However, the other piece of the puzzle is supply.
As I have mentioned before, the United States energy sector has exploded, turning past predictions on their head. You have heard the line about America having to end our addiction to foreign oil? Well, we are less addicted, at the very least, Tom. In 2008, the U.S. produced 1.83 billion barrels of crude oil. In 2013, that number was 2.7 billion.
In 6 years, we have halved energy imports as a percentage of GDP. Domestic fossil fuel imports decreased to $225 billion, or 1.3% of gross GDP in 2013 from $412 billion – or 2.8% – of GDP in 2008. This has really caused big downward pressure on oil prices, and it has rattled the stock market a bit, even though it is a positive development.
Skip: If it were positive, why would the markets react negatively?
Mellody: On the surface, it does seem contradictory. It is actually more like the market is taking a page from Goldilocks, trying to strike a balance between slower growth around the world with the benefits of cheaper oil and more money in the pockets of consumers.
Last week’s jitters has a lot to do with the fact that in the short- to medium-term, the energy sector is going to have a rough go, with huge companies like Exxon, Chevron and others taking a hit. Energy makes up about 10% of the S&P 500, so the negatives for the energy sector certainly show up in the broader market.
Skip: Good to know! One last question, Mellody: what should we expect from the market in 2015?
Mellody: Well, Skip, I have to say I am an optimist. All of the economic indicators are looking solid, and they point to slow but steady growth here in the United States – even in spite of slowing economies in other parts of the world. On top of that, corporate America, and multinationals around the world, are in great shape. I expect 2015 will be like 2013 or 2014.
The past two years have been really outstanding, and it looks like they will both be double-digit growth years for the markets. However, I think 2015 will be solid – again not gangbusters – but solid. Remember, there are always adjustments and bumps, but things are pointing in the right direction.
Skip: Thanks for joining us, Mellody, for this final Money Monday of 2014!
Mellody: You are welcome, Skip! Happy holidays! Have a great year end, everyone!