Last year our real GDP grew 2.4 percent, primarily driven by personal consumption and fixed investments, by both residential and non-residential fixed investments. However, markets in 2015 ended up flat. That also means corporations have added one-year worth of retained earnings in their balance sheets without any market price gains. At the end of last week, markets earnings declined by 9 percent compared to last year. You can also say markets are approximately 11 percent cheaper than they were on the beginning of last year.

There are number of unknown fears and concerns that seems to  spook investors lately. In my opinion, many of these fears are caused by the faulty reasoning and improper processing of the market data.

Biggest of all the fears is: drop in oil prices. When prices go up against the fundamentals than they fall as rapidly as they grow. It was evident in the year 2000, the market crash was due to overpriced internet stocks and in 2008 same happened after overpriced housing sector. This is what exactly is happening in the oil industry. There is an abundant supply of oil from shale producers in the U.S. and as it  happens to be, U.S. is the biggest oil consumer in the world.  At one-point, barrel of oil went up to $140, encouraging more and more drilling. There is no room to store the excess oil produced in the U.S.; all those oil tankers are full and floating in the gulf.  Due to this over (abundant) supply, prices plunged and opened the door to export oil from U.S., for the first time after Arab oil embargo. 

Naturally, oil companies started cutting, drilling and slowing the capital expenditure; sure it has some impact on the economy since energy sector weighs 6.6% of S&P 500. But what about the rest of the sectors? Every sector in S&P is benefiting, either directly or indirectly due to lower oil prices., for example: chemical companies, fertilizer firms, agricultural sector and biggest of all, the transportation firms such as airline industries, consumer discretionary and staples sectors. Low prices in the energy sectors is for everyone's benefit. Last year, U.S. consumers benefited approximately $129 billion on fuel savings, which is $960 per household. If you add industrial and transportation sector savings the benefits are enormous. Low energy prices became the biggest economic stimulus both domestically and also abroad as in India and China.

Fear of market multiples: As of last week S&P 500 Price to earnings ratio is at approximately 20.5 that means 4.86% in earning yield. When compared to 10 year treasuries yield of 1.75%, stock market looks reasonably priced. Many pundits measure market averages with cyclically adjusted ten-year average earnings. The biggest flaw in this comparison is outlier corporate earnings in the great recession year 2008. If the year 2008 earnings excluded and extend it to one more year in the past, then the average goes down to very reasonable multiples (No offense Dr. Shiller).  There is no way we can say market expansion stops at PE multiples of 20. We don’t see the irrational prices in the market or we have not noticed over enthusiasm by novice investors yet.

Fed’s increase in interest rates: Market wild swings started right after Fed raised interest rates from zero to 0.25%, which happened after a  prolonged period of zero interest rates. Our economy is in excellent condition to handle normalization of the interest rates. Normalization of the interest rates are not a bad omen. Due to lower interest rate, environment banks could not take risk lending money to the borrowers.

On the other hand, Fed cannot take unilateral decision of raising interest rates too far as it could over heat the dollar value since rest of the developed countries in the Europe and Japan kept their interest rates below zero. Now Fed has to watch not only the domestic inflation but also interest rates and inflation at our trading partners.

Slowing Chinese Economy:  Chinese economy slowed a bit this year but still growing at healthy pace of 6.8% rate. Chinese equity market is isolated, not open for all foreign investors. It is different beast all together. Shanghai index returned 61% in Renminbi terms.. China is celebrating Y2K moment for the past couple of months. China’s equity market is a closed market but it always has some impact on the global markets. The Ripple effect: we are having tremors while earth is shaking in China

Finally, Recession fears:

Even though 2016 market started with losses, i believe this year U.S. GDP will advance little, over 2% and that is why i do not see recession on the horizon. Unlike the last two years’ unusual warm weather will help first quarter GDP to grow better than in the past. Savings on energy is evident in the consumer discretionary spending such as automobile sales. Airline industry is also benefiting dearly from lower energy prices.

Unemployment is so low now a days, which is creating a wage inflation - a positive sign of healthy growth. Average weekly hours in the manufacturing sector are improving, seasonally adjusted unemployment insurance claims are in declining, building permits for new homes are slightly improved, and globally in all major economies Yield curve is steep. These are all good indicators of future economy.

So far wild swings in the markets caused so much volatility; it was not a great market for the faint hearts. People respond more for losses than pleasure of the gains. This year we see calm after the storm. Probably it is a good time to keep your feet wet in the market and keep a long term perspective according to your individual needs.