2016 February Financial Market Update

Transcription

1 Charles Sherry Director, Institutional Education Group Blue Ocean Global Wealth 51 Monroe St., Plaza West 06 Rockville, MD Tel: February Financial Market Update February 29, 2016 Seeking Stability Last month, I maintained there were several things that needed to happen before stocks might stabilize. The list below is not all inclusive but touches on the major themes. 1. A bottom in oil prices. 2. Greater stability in the dollar. 3. Economic data that point to a growing economy. 4. Some semblance that China is getting its economic house in order. Index February Return %* 2016 YTD Return % DJIA NASDAQ Composite S&P 500 Index FTSE Developed ex North America Index 4 Bond Yields Yield* - % a/o Feb 29, 2016 Yield - % a/o Dec 31, month T-bill 0.33 Unch year Treasury year Treasury year Treasury Commodities Feb 29 Price, Monthly Change* Year end 2015 Oil per barrel $33.90 $37.07 Gold per ounce 6 $1, $1, Sources: U.S. Treasury, MarketWatch, St. Louis Federal Reserve, CNBC

2 *Monthly: January 29, 2016 February 29, 2016 Let s start with point number one. Figure 1 graphically illustrates the close relationship between oil prices and stocks. Stocks and Oil 2,150 2,100 S&P 500 Index Fig. 1 WTI Crude Oil $/barrel ,050 2, , ,900 1,850 Correlation = ,800 11/30/ /31/2015 1/31/2016 Data Source: St. Louis Federal Reserve Last Date: Note: Correlation of +1 means the two variables move in lockstep; a correlation of -1 means they move in the opposite direction Stabilizing or rising oil prices seem likely to support stocks. Yet, it seems counterintuitive. The U.S. is an oil importing nation. Every time you or I fill at the pump we save money. It s like a tax-free raise. Besides, weren t we complaining 10 years ago when gasoline prices were hitting $3 and $4 per gallon? It s really a rhetorical question. We were! Here s the problem. The benefits of lower oil prices have been slow to materialize. Though there are indications a shift is occurring, much of the evidence suggests consumers have been saving the windfall at the pump or using it to pay down debt. Long term, that s a good thing. However, the collapse in oil prices has forced sharp layoffs and cutbacks in spending by oil companies, without a significant consumer or business response outside the energy industry. Furthermore, loans to the energy patch are getting shaky, which causes lenders to re-evaluate credit standards to both energy and non-energy lenders alike. Simply put, strong economic headwinds have been met with modest tailwinds.

3 King Dollar Moving along, the dollar has rallied over the last year against most currencies. It benefits U.S. travelers when they go abroad, and it reduces the price of imports. But it s a doubled-edged sword because sales of U.S. corporations around the globe must be translated back into pricier dollars. End result sales take a hit, which in turn, cuts into profits. For example, Microsoft (MSFT $51) noted that sales in the quarter just ended were five percentage points lower because of the stronger dollar, and DuPont (DD $61) said sales were eight percentage points lower (Investor Relations) because of the dollar. Table 1 takes a much broader look at the dollar s rise, but it also suggests such headwinds will significantly abate in the first quarter. Q Q Q Q Q Dollar Headwind* 18% 20% 17% 12% 3% Source: LPL Research, Bloomberg, MarketWatch Date: 2/22/2016 Q is an estimate *Percent change from one-year ago in the dollar versus the currencies of the eurozone, Japan, the U.K., Canada, Sweden, and Switzerland Of course, the forecast is predicated on how the dollar performs and there are plenty of factors that may influence the greenback, both positively and negatively. But any stability in the dollar would be a plus for the bottom line of major corporations that do a significant portion of their business overseas. Economic activity rebounds in early 2016 Bear markets, or declines in the major indexes of at least 20%, usually coincide with recessions (St. Louis Federal Reserve). Avoid a recession and we probably avoid a bear market. Good news early economic data point to faster economic growth following Q s annualized 1.0% increase in Gross Domestic Product (U.S. Bureau of Economic Analysis). While much can change, the Atlanta Fed s GDPNow model, which incorporates new economic data as it s released, is projecting a rise in Q1 GDP of 1.9% (as of March 1). It s far from impressive but would be a welcome rise following the slowdown at the end of last year. Bottom line economic growth aids corporate profits, which in turn lends support to stocks.

4 China China s problems won t be fixed overnight and there has been a healthy debate over whether Chinese policy makers can successfully steer China s capitalist/communist system. Eventually, markets may shift their attention away from China. For now, the uptick in the value of the yuan (see Fig. 2) can be viewed as a modest positive for U.S. stocks. Looking ahead Brexit Many of the themes that greeted 2016 are still in place, though some are not as prevalent as they were during January s dismal performance. Here s a new one that popped up on the radar Brexit. It s a play on Grexit, which was defined as the possibility Greece might exit the eurozone, or the 19 nations that use the euro for its currency. Brexit is defined as the possibility Britain may exit the 28-nation European Union, which is a political and economic alliance that allows member countries to benefit from free trade at the expense of giving up some political authority. British voters will participate in a June 23 yes-or-no referendum. Polls suggest pro-eu forces are slightly ahead (Intl. Business Times), but there s plenty of time left and polls have been known to incorrectly gauge sentiment. Most economists see problems in the short term if Britain leaves the EU, but anti-eu forces believe the removal of burdensome regulations would benefit the nation. The U.K. s economy is much more important to Europe than Greece, and we may see added uncertainty if the election appears to be too close to call. If polls start leaning to an exit, expect plenty of negotiations and concessions, as pro-eu forces in Britain and in Europe seek to avoid such an outcome. 1 The Dow Jones Industrials Average is an unmanaged index of 30 major companies which cannot be invested into directly. Past performance does not guarantee future results. 2 The NASDAQ Composite is an unmanaged index of companies which cannot be invested into directly. Past performance does not guarantee future results. 3 The S&P 500 Index is an unmanaged index of 500 larger companies which cannot be invested into directly. Past performance does not guarantee future results. 4 The FTSE Developed ex North America Index is an unmanaged index of large and mid-cap stocks providing coverage of developed markets, excluding the US and Canada. It cannot be invested into directly. Past performance does not guarantee future results. 5 New York Mercantile Exchange front-month contract; Prices can and do vary; past performance does not guarantee future results. 6 London Bullion Market Association; gold fixing pricing; Prices can and do vary; past performance does not guarantee future results. It is important that you do not use this publication to request or authorize the purchase or sale of any security or commodity, or to request any other transactions. Any such request, orders or instructions will not be accepted and will not be processed.

5 All items discussed in this report are for informational purposes only, are not advice of any kind, and are not intended as a solicitation to buy, hold, or sell any securities. Nothing contained herein constitutes tax, legal, insurance, or investment advice. DISCLOSURE: Investing involves risk including the potential loss of principal. No strategy can assure success or protects against loss. Past performance is no guarantee of future results. Asset allocation does not ensure a profit or protect against loss. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk. Please note that rebalancing investments may cause investors to incur transaction costs and, when rebalancing a non-retirement account, taxable events will be created that may increase your tax liability. Rebalancing a portfolio cannot assure a profit or protect against a loss in any given market environment. Fixed income investments are subject to various risks including changes in interest rates, credit quality, inflation risk, market valuations, prepayments, corporate events, tax ramifications and other factors. Non-U.S. securities markets involve possibly greater risk of political instability and greater currency risk in addition to having been more volatile. These risks can be accentuated in emerging markets. Commodities investments are speculative and involve special risks related to weather and international political and economic developments. Equity investments tend to be volatile and do not involve the guarantees associated with holding a bond to maturity. Alternative investments may not be suitable for all investors and should be considered as an investment for the risk capital portion of the portfolio. Tactical allocation may involve more frequent buying and selling of assets and will tend to general higher transaction cost. Investors should consider the tax consequences of moving positions more frequently. Beta measures a portfolio s volatility relative to its benchmark. A Beta greater than 1 suggests the portfolio has historically been more volatile than its benchmark. A Beta less than 1 suggests the portfolio has historically been less volatile than its benchmark. Past performance is not a guarantee of future performance. Different investments involve different degrees of risk, and there can be no assurance that the future performance of any investment, security, commodity or investment strategy that is referenced will be profitable or be suitable for your portfolio. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Before making any investments or making any type of investment decision, please consult with your financial advisor and determine how a security may fit into your investment portfolio, how a decision may affect your financial position and how it may impact your financial goals. All opinions are subject to change without notice in response to changing market and/or economic conditions Copyright 2016 Financial Jumble, LLC Blue Ocean Global Wealth All rights reserved.