Is It Time to Head for the Exits?

February 10, 2016

2 minute read

Is It Time to Head for the Exits?

by Daniel Loewy and Seth Masters, AllianceBernstein

In our view, recent market conditions are more likely to signal a short-term bump in the road, rather than a prolonged recession or financial crisis that leads to an extended bear market. Here’s why.

While stock market returns reflect economic growth over the long run, market signals and economic fundamentals can diverge at times along the way. We see that happening now. The market is effectively pricing in a view that disruptions in the energy market and weakness in China will soon trigger a global recession. We continue to think the economy will grow, albeit at a moderate pace.

In our view, the labor market and consumer demand in the US are strong. Thanks to monetary stimulus, conditions in Europe and Japan are steady. China’s economic growth rate is decelerating, but continued strength in the consumer sector should enable China to grow around 6% a year—a level most countries can only dream of.

As for oil, the latest drop in prices has a silver lining. While it creates near-term pressure in some parts of the economy, low fuel prices help many companies that use energy, as well as virtually all households. On the whole, lower oil prices should boost the economy slightly. On balance, we see today’s uncertainty contributing to greater volatility, but not to greater risk of sustained capital losses.

We’ve found that in times like the present, when macroeconomic concerns drive markets, new information can lead to abrupt shifts from optimism to pessimism, and vice versa; these shifts in sentiment lead to short-lived spikes in volatility. In these “risk-on, risk-off” environments, when extreme swings in sentiment—not fundamentals—drive volatility, focusing on long-term fundamentals is key to success, in our view.

Hence, we do not believe it is prudent for investors to move away from their long-term strategic allocations at this point, and we are not recommending to clients that they sell equities. Our Dynamic Asset Allocation service, which adjusts client exposures to manage risk, is only slightly underweight stocks—and is taking advantage of the sentiment-driven swings in stocks by buying low and selling high. In our view, this environment can prove fruitful for investors who remain calm while others panic.

The views expressed herein do not constitute research, investment advice or trade recommendations and do not necessarily represent the views of all AB portfolio-management teams.