When the indigestion started in December, the conventional wisdom was: relax.
Then a week of volatility turned into a month of declines and by the end of January — even with Friday’s 396-point jump — the Dow Jones Industrial Average had fallen 1,846 points from last May’s peak. A lot of people had stopped believing that the problem is just a bitter aftertaste from something China ate.
“Clients call … and say, ‘Level with me, how bad is it?’” said Mary Ellen Garrett, senior vice president of wealth management for Merrill Lynch in Atlanta. “‘Do I have to go back to work again? Or do I need to get a second job?’”
Anyone with a stake in the economy — which is everyone — wonders if the new year’s market gyrations are just a reaction to China’s slowdown, or the oil price tumble, or something worse. As in, the signs of the next recession.
Garrett tells clients that the economic fundamentals remain solid, if not sensational.
“We are not preparing for an apocalypse,” Garrett said. “We are not seeing anything that changes the fundamentals. And those fundamentals do not indicate to us that we are going into a recessionary period.”
Georgia’s economic rebound has quickened over the past year, with the metro area’s unemployment rate now below 5 percent and steady job growth. But the state isn’t immune from the national and global economy, especially through Hartsfield-Jackson International Airport and the huge port of Savannah.
Adrian Cronje, chief investment officer of Atlanta-based Balentine, which manages investments, said he isn’t gloomy but does worry about the mix of “headwinds” — including the Federal Reserve’s recent decision to start raising interest rates.
Oil sector kneecapped
The mostly unpredicted plunge in oil prices has kneecapped what had been a strong sector of the national economy, while also threatening many banks that had made loans to fund exploration, Cronje noted.
Meanwhile, lower gas prices have not spurred consumer spending.
He also sees troubling signs in the prices of other commodities, and in the bond and credit markets.
Orders for big-ticket items fell 5 percent last month. The index of leading indicators, too, dropped – as did several manufacturing measures.
Yet the overall economy is still growing.
The U.S. economy should expand this year at a healthy 3 percent pace, predicted Adam Coker, managing director for US Trust in Atlanta, the private wealth management unit for Bank of America.
“I think the fundamentals are a little more encouraging than you would believe from just looking at the declining stock prices and the pace of volatility.”
Volatility in context
Prior to Friday the stock market this year had just three days in which prices rose or fell at least 2 percent, he said. In 2009, there were 55 such days, and 72 in 2008.
“We are in a volatile period, but you have to put it into context,” Coker said. “Investors always think that what is happening now is going to happen forever.”
Once the mood starts to shift on Wall Street, it can quickly go from greed to fear, said Jeff Korzenik, chief investment strategist for Fifth Third Bank in Atlanta. “Every bump in the road gets catastrophized.”
Just because cheaper energy hasn’t fueled the economy yet doesn’t mean it won’t, he said.
“Oil prices will continue to benefit the U.S. consumer. It just takes time to play out.”
A soaring stock market has what economists call a “wealth effect,” making people feel richer and encouraging them to spend more. It also can work in reverse: As people see 401k or other account balances sliding, they tend to cut back and avoid big purchases.
“We would worry if we saw a spillover into consumer behavior, a pullback from retail sales, from auto sales,” Korzenik said.
Overly cautious
When companies get overly cautious – or worse, cut workers – other workers feel less secure. And if lots of people get nervous and spend less, that makes companies more cautious.
That hasn’t happened yet. The nation had a good year of hiring in 2015 and Georgia added more than 91,000 jobs — 77,800 of them in metro Atlanta.
Still, slow wage growth and disruption from global forces and technology seem to have people on edge. Nearly 80 percent of Americans say the economy is fair or poor, compared to 21 percent who believe it is good or excellent, according to a poll this month commissioned by Allstate and the National Journal.
About one-quarter said they think things will get worse in the next year.
Risk Innovation, a 40-person insurance wholesaler, has been hiring underwriters, sales people and clerical staff, said Bruce Peddle, owner and managing partner of the Atlanta-based company.
But if there were layoffs in other companies, it would hurt his own bottom line. He hasn’t see it, but he is keenly aware of the news — the trouble in China, the collapse of oil, the falling stocks.
“There are red flags,” Peddle said. “And that definitely has an impact on the way we think. So we are more cautious about our hiring.”
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