2016 January Financial Market Update

Transcription

1 Charles Sherry Director, Institutional Education Group Blue Ocean Global Wealth 51 Monroe St., Plaza West 06 Rockville, MD Tel: January Financial Market Update January 31, 2016 A Sour Start to 2016 There is no way to sugarcoat it stocks turned in their worst January performance since 2009 (MarketWatch). And there was no shortage of finger pointing to cite for the January selloff. China s problems, oil prices, recession fears, woes in manufacturing, the strong dollar, rising yields in junk bonds (mostly but not limited to energy and the mining sectors), the Federal Reserve, political uncertainty, and sales by sovereign wealth funds. That's a mouthful. I won t belabor the entire list, but let s hit the big ones starting with China. Then I ll highlight some factors that may help stabilize or support shares. Index January Return %* 2016 YTD Return % DJIA NASDAQ Composite S&P 500 Index FTSE Developed ex North America Index 4 Bond Yields Yield* - % a/o Jan 29, 2016 Yield - % a/o Dec 31, month T-bill year Treasury year Treasury year Treasury Commodities Jan 29 Price, Monthly Change* Year end 2015 Oil per barrel 5 $33.74 $ Gold per ounce 6 $1, $1,062.25

2 Sources: U.S. Treasury, MarketWatch, St. Louis Federal Reserve, CNBC *Monthly: December 31, 2015 January 29, 2016 The month began with renewed worries about China. That fact is U.S. exports to China account for just under 1% of U.S. Gross Domestic Product (U.S. BEA), the largest measure of U.S. economic activity. According to the U.S. BEA, exports to China were virtually unchanged in the first nine months of 2015 versus the same period in In other words, no lift or drag from China. The same can t be said of Canada, the largest single U.S. trading partner (per the U.S. BEA) and Brazil, and no one s blaming market uncertainty on them! Furthermore, sales to China by S&P 500 companies amount to just 2% of their total sales (Goldman Sachs). China is the world s second largest economy, but we simply aren t dependent on the Asian giant. Let s move on oil The stunning drop in oil and gasoline prices was supposed to be a net positive for the economy. So far it hasn t. Steep cutbacks in energy projects, layoffs in the industry, and the spillover into energy junk bonds and manufacturing has more than offset any positives from all the cash we re saving at the pump. Unlike the collapse in energy prices in the second half of 2008, the decline hasn t been related to falling global demand. Instead, there s too much supply. Innovation in the U.S. energy industry unlocked an enormous amount of previously unreachable shale oil, reducing U.S. imports and forcing that supply on the world market. Moreover, Russia and Saudi Arabia, the world s leading oil producers (CIA World Fact Book, U.S is third), have so far refused to cut production. And let s not forget the strength in the dollar. Oil is priced in dollars when sold around the world. Those costlier dollars have pressured prices, too (St. Louis Federal Reserve, Energy Information Admin). Figure 1 highlights the loose correlation between oil and the S&P 500 Index. Since May 1, 2015, the two assets have had a correlation of 0.62, where +1.0 would mean they move together and -1.0 would mean they move in the opposite direction. Since January 1, the correlation has jumped to That s steep!

3 Stocks and Oil 2,150 2,100 2,050 2,000 1,950 Fig. 1 $/barrel ,900 1,850 S&P 500 Index WTI Crude Oil ,800 5/1/2015 7/1/2015 9/1/ /1/2015 1/1/2016 DATA SOURCE: ST. LOUIS FEDERAL RESERVE, CNBC LAST DATE: You see falling oil prices have clobbered earnings in the energy sector, which has been a big drag on overall corporate profits (Thomson Reuters). In turn, that creates a headwind for stocks. More recently, there is a concern that falling oil prices may be a reflection of moderating global economic demand. Rightly or wrongly, that also works against stocks. Given the steep drop in oil prices, there have been unconfirmed reports (BBC.com) that sovereign wealth funds (SWFs) are unloading shares. SWFs are funds run by nations; in particular, oil rich nations. With oil wallowing around $30/barrel, there appears to be a fire sale of assets going on quietly in equity markets, according the BBC, as cash-pressed nations raise needed funds. Corporate earnings That brings us to corporate profits. Profits are probably the biggest determinant in the medium and longer-term direction of stocks. Earnings growth has stalled and the outlook has dimmed in 2016 see Figure 1. In part, it s energy. In part, it s the strong dollar, which means U.S. companies doing business overseas must translate sales back into more expensive dollars. Note in Figure 2 how earnings growth slowed through 2015 before turning negative in the third quarter. Also note the forecast for corporate profits issued near the end of January has been trimmed versus November 30. In particular, Q is now forecast to be negative and Q2 is barely positive.

4 Cut through the weeds it creates added uncertainty. Looking ahead S&P 500 Earnings - percent change from one year ago Percent Actual Fig. 2 Forecast -2 S&P 500 Earnings forecast as of Nov 30, S&P 500 Earnings forecast as of Jan 28, Q1'13 Q3'13 Q1'14 Q3'14 Q1'15 Q3'15 Q1'16 Q3'16 Data Source: Thomson Reuters Last Estimate: Thus far the correction in stocks has been modest. What has been eye catching has been the volatility 11 of 19 trading days saw the Dow go up or down by more than 200 points (St. Louis Federal Reserve). Remember, stocks never go up in straight line. Corrections will happen from time to time. Since 1928, a 10% correction has occurred on average every 1.58 years, according to Charles Schwab. During the bull run that began in 2009, we have experienced only three. But two of them have occurred in the last six months. So what will it take to stabilize stocks? Here are some of the biggest stabilizers, in my view 1. A bottom in commodities prices would likely be a plus. While falling oil prices have been a boon for consumers, it has crushed energy earnings, which feed into overall corporate profits. Plus, it has created big problems in the high-yield debt market. Yet, we aren t really seeing much of benefit to the non-energy sectors of the economy. At least not yet. While I maintain that much of what is happening to energy and commodities is a supply issue versus falling demand, it has hurt overall sentiment. 2. Greater stability in the dollar would also help. A stronger U.S. currency is a plus when one travels overseas, but it works against revenues of multinational corporations.

5 3. Some semblance that China is getting its economic house in order. While I ve repeatedly said the U.S. economy doesn t depend on China, negative sentiment has created ripples in our markets. Eventually, markets may shift their attention away from China, but its problems are likely to linger for some time. 4. Finally, economic data that continue to suggest the economy is moving ahead, even if it s at a modest pace. Bear markets, or declines in the major indexes of at least 20%, have usually coincided with recessions (St. Louis Federal Reserve, NBER). Avoid a recession and we probably avoid a bear market. While there has been some recession talk lately, most analysts foresee a continuation of the economic expansion in That s a big positive. 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. 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.

6 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.