Down, down, down. - Alaska Permanent Capital Management


Down, down, down.

Stocks fell sharply for the second week in a row, testing the August 2015 lows. The S&P 500 lost -2.2% for the week and is down -7.9% year to date. The tech heavy Nasdaq is off -10.3% in 2016. Foreign developed equity markets have also lost anywhere from 7-11% over the past two weeks. And the Shanghai index in China is down a whopping -19.2% so far this year.

Safe haven assets like Treasury bonds rallied in price, sending yields down almost 10 basis points for the 10 year Treasury, which closed at 2.04%. Gold is up almost 3% so far this year.

Just like last August, Shanghai volatility and worries of a China slowdown are unnerving investors. That combined with a rapid drop in the price of oil (off $8 bucks per barrel so far in 2016 and now trading below $30) has caused declines in equity markets around the world.

International sanctions may be lifted this coming Monday which will allow Iran to resume oil exports. Meanwhile, Goldman Sachs is out predicting a “bull market” in oil beginning in the second half of the year.

The headlines are getting nasty as they always do when stock markets head south. Here is a taste.

WSJ: “The price of US oil has dropped under $30 a barrel for the first time in 12 years, setting off a chain reaction worldwide and calling into question the industry’s survival. BP says it will cut its workforce by 5%. Wells Fargo, a major lender to the energy sector, says US shale producers can’t survive if oil holds below $40 a barrel for a long time.” In reality, while some frackers may go out of buisness, the global oil companies can certainly weather these storms, unless they last for a very long time – which is highly improbable.

A WSJ blog: RBS Warns Sell Everything: “RBS economists have urged investors to sell everything except high-quality bonds, warning of a fairly cataclysmic year ahead.” They note that “the world economy looks all too similar to 2008.”

I have to say, with “RBS economists” like that who needs enemies! Really this is irresponsible. Maybe it looks like August of 2015 with oil and China worries, but 2008? The financial system is WAY stronger today vs. then. But that is besides the point. It is NEVER good advice to sell all and liquidate your portfolio because of some pundit or soothsayer predicting doom. Hopefully your portfolio was built for the long term and can weather storms consistent with your risk tolerance. Tweak it – fine, if you must, but no wholesale shifts.

Ed Yardeni: “In our view, this latest panic attack will soon pass as investors become more confident that neither the US economy nor profits are falling into a recession.”

Evercore ISI: “Ultimately some clarity on China’s outlook and a floor on crude oil prices should reduce… uncertainty and improve the odds.”

Financial Times: “This is all pretty dour, and we may all need to take a step back. Because bearishness is en vogue, and everyone seems to be particularly aware that bearish data does not mean that the next market is especially likely to be a bear. On the contrary, in fact. Groundless optimism, rather than paranoid pessimism, is the most fertile ground for a bitter harvest. And the week ended with some reassuringly calm words from Jamie Dimon on JP Morgan’s earnings call. As far as he can see, the economy is holding up. Cheap oil prices are not the end of the world. The market’s mood is not a reliable indicator.

Nervousness over Q4 earnings is also spooking investors. Forecasts call for a 4.2% decline in Q4 earnings and a 3.2% decrease in revenue for companies in the Standard & Poor’s 500 index. (Keep in mind that companies almost always “beat” analysts estimates by 3 or 4%.) Next year’s earnings (2016) are forecast to be up 7%.

WSJ: “J.P. Morgan Chase…reported a profit of $5.4 billion, or $1.32 a share. That compares with a profit of $4.9 billion, or $1.19 a share, in the same period of 2014. Analysts expected earnings of $1.25 a share.” (That’s +11% EPS growth YoY).

No sense in sugarcoating matters. We are off to one of the worst starts ever as far as the equity markets are concerned. Two weeks do not make a year nor should such a period be particularly worrisome for long term investors. Hang in there.

Monday is Martin Luther King, Jr. Day. The markets and APCM will be closed.


Jeff Pantages, CFA®
Chief Investment Officer


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