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Rebecca Katz: Our first question is from Linda. She's in Boston, Massachusetts. And she said, "Do you foresee volatility in the financial markets continuing in 2016?" So, Tim, I'll toss that one to you.
Tim Buckley: Well, for Linda, really, she should expect volatility to continue. We're coming out of a period where, well, we had lower than usual volatility. If you look at the past three years, it's been below average. And in the past few days, we have come up to average volatility if you go back to 1990, and now we've gone past that. So we're in a more volatile period, but it's probably more typical than what we had in the past three years in that volatility.
Now in that question I'm sure is, so what's causing all this volatility? Why now? Well, in the past, we had extreme monetary actions by the Federal Reserve, other central banks which help mute volatility. So that is easing off now. Certainly, in the U.S. it's gone and elsewhere it still exists. But another thing that happens you have to have the context of the global environment. And that is what is driving growth? What has been driving growth?
And that has been called the story of the tortoise and the hare. You had the U.S. plugging along, the tortoise, at a 2% growth rate. And we have complained about that 2% growth rate, but it has been consistent year after year. And you've had China coming out of the global financial crisis growing at a breakneck pace, double-digit growth, and now it's started to slow.
China is going through a transformation. It's going from this industrial complex, manufacturers, to one that's more of a consumption, service-based economy. It is a huge economy. It's 13% of the world's GDP. The U.S. is 22. So these are the two big titans, right, driving the economy.
And as China slows, everyone wants to know how much is it slowing? Well, China is not like the U.S. It's opaque. So you can't see that industrial complex that's slowing down. That's slowing down at the same time you have the service industry that's building. And the consumption is growing 8 to 10% a year, but how much is that production slowing down? You don't get great numbers out of that.
And so recently we had a number that printed that said, "Well, the manufacturing is slowing down more than people expected, or that many people expected, and maybe service isn't growing as fast." So suddenly everybody started thinking, "Global growth isn't what it's going to be." You got the tortoise chugging along and the hare's getting tired now, getting winded. And, thus, a selloff in China and people worried about global growth you start to see that selloff here. That is the volatility you're feeling here. It might be a bit of an overreaction because you really don't know what the right numbers are, but, unfortunately, it's probably to be expected in the coming year.
Bill McNabb: You know, just a comment on that, Rebecca, the U.S. market correction, this is the third-longest bull market in history. And because of the depths of the great financial crisis in 2008 and '09, people sometimes forget from the bottom of 2009 to the end of last year, this is one of the longest uninterrupted bull markets and, literally, the third largest. And if you think about that, typically markets do have cycles so it's not unexpected that you would see some pullback at some point.
Tim Buckley: And, I think, Bill, you would echo this too, we don't see a bubble out there. What we see are richer valuations. So when you think about bonds, well, their yields are still historically low, which means that they're expensive. And with stocks, you look at their historical valuations and they're above their long-term averages. In some cases, depending on your measure, considerably above their long-term averages.
They're not in a spot where you'd say, "It's a bubble and we're in for a crash." That's not, as we look at it, we just think differently. We think, "We'll just have different expectations for long-term returns. It doesn't mean you have to plummet before you go up."
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Investments in stocks issued by non-U.S. companies are subject to risks including country/regional risk, which is the chance that political upheaval, financial troubles, or natural disasters will adversely affect the value of securities issues by companies in foreign countries or regions; and currency risk, which is the chance that the value of a foreign investment, measured in U.S. dollars, will decrease because of unfavorable changes in currency exchange rates.
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