Thoughts after the First Trading Day of 2016

The first trading day of 2016 was not pleasant – unless you are looking for bargains. Geopolitical forces are making investors nervous. Iran and Saudi Arabia have broken off relations and an already tense situation is getting worse. Millions of refugees are voting with their feet.

Chinese central-planners are finding out how bad central planning actually works in practice. We don’t expect the Chinese economy to completely collapse, but we do expect to see a little more humility on the part of those who argue that the Chinese model is one that should be copied.

That leads us to look at the U.S., where the economy continues to move along, albeit slower than we would like. The number of “Help Wanted” signs on store windows does offer some encouragement. We also note the number of new buildings and shopping centers under construction. That seems to indicate that Main Street is feeling more optimistic.

The drop in oil prices has been good for the consumer, but not so good for the energy industry, creating a headwind for parts of the economy that produce or extract raw materials, such as petroleum products and mining.

We don’t expect the minor tweaks that the Federal Reserve is making in interest rates to have much of an impact on the slow economic recovery.

We echo the sentiments of Brian Wesbury, who wrote in an e-mail earlier today:

The entrepreneurial spirit will continue to push back against the weight of government spending, taxation and regulation. In addition, market participants will deal with the fog of war in the Middle East and flailing attempts by Chinese central-planners to boost growth using command-and-control. Look, we can’t promise anything. But, in spite of the increase in the past year, government is no bigger today than it was three years ago, stocks remain undervalued, and money isn’t tight. In spite of the huge decline in stocks today, the first trading day of the year, we remain positive.

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