The Dow has fallen nearly 1,000 points thus far in 2016, a troubling statistic as the new year is only a few trading days old. The size and frequency of the big selloffs could have some investors thinking that markets are mired in the middle of another meltdown, but don't worry, they're not.
It's true that there are a number of headwinds out there for the market -- many of which are worth keeping an eye on and guarding against -- but the conditions are nowhere near as severe as they were during the Financial Crisis. The coming days or weeks may require some backbone to power through, but long-term investors should consider using the discounted prices as an opportunity to add to positions. Here are five reasons why 2016 isn't like 2008, and why we expect the long-term trend to remain positive:
The Financial Crisis was caused by a lot of things, but the most important was the destruction of the housing market. There is nothing equivalent this time around -- no material asset bubble that's popping and sending shock-waves throughout the economy. Valuations for U.S. stocks have gotten somewhat stretched, admittedly, but they're not overdone the way they were going into the crisis. If anything, the weakness we're seeing is just shaking some of the excess out of the market. That can be a bumpy process, but it is normal and healthy.
The market's performance thus far in 2016 may be surprising, but the factors behind it shouldn't be. The big headwinds out there -- China's slowing growth, oil plummeting, geopolitical tensions -- are hardly new. China and oil were the major stories of 2015, so while new developments on those fronts will cause analysts to adjust their forecasts -- a process that leads to volatility -- they lack the surprise that leads to real collapses. When the housing bubble burst, nearly everyone was caught off guard about the scale of the bad mortgages. Today, investors have long been cautious about China, so when the country reports disappointing data, it underlines concerns rather than demolishing a previously bullish case.
Major crises tend to exert their impact across asset classes. Despite the headlines, neither gold nor Treasuries have seen major gains so far this year. They've attracted some inflows, to be sure, but there isn't an indication of a "rush" to buy these safe-haven assets. That indicates caution on the part of investors, not panic.
During the Financial Crisis, the Federal Reserve (and other central banks around the world) took extraordinary measures to stabilize the market. In contrast, the Fed is becoming less accommodative right now. It raised interest rates in December and will likely do so again at least once this year. That's a sign that even though fear is high, the U.S. central bank views the economy as fundamentally strong enough to function without the outside assistance it has had for years.
The Financial Crisis didn't just lead to a recession, but the Great Recession, as it is now known. Right now, U.S. GDP has been growing around 2% on an annualized basis -- hardly a gangbusters pace, but to go from that to two consecutive quarters of negative growth would take a lot more than China decelerating. The U.S. labor market and housing market remain strong, important indicators that a recession is incredibly unlikely this year.
Of course, remembering this kind of context can only assuage someone's concerns so much. The question that's probably foremost in everyone's mind is how much worse the market can get from here.
Frankly, it seems likely that Wall Street could see several pullbacks in the range of 8%-to-12% this year. Keep in mind, however, that that is fairly typical; historically, stocks undergo one correction a year, a necessary evil to "cool off" overheated markets. Wall Street's recent multi-year streak without a correction (defined as a pullback of 10%) was highly atypical, and largely made possible by the Federal Reserve's accommodative policies.
So, while additional caution and defensiveness are useful in this environment, investors should remember that just because a plane is experiencing turbulence, that doesn't mean it's going to crash. Current market action aside, we expect the S&P 500 to show gains for the year.
This article is commentary by an independent contributor.