After a very lackluster 2015, the global equity markets are starting off the new year on the wrong foot as Chinese stock market volatility (and yuan depreciation) throughout the week unnerved investors. This despite a very strong US payroll employment number out Friday that saw 292,000 new jobs added to the economy last month while the unemployment rate held steady at 5%.
The S&P 500 ended the week down -5.9% at 1,922. And that was good performance versus other stock markets such as the Euro Stoxx 600 index that lost -6.5%. The Shanghai index, which started all the trouble, steadied on Friday gaining 2%, but was down -11.4% for the week. The FT notes that “it is the worst start to a year for global markets in at least two decades.”
Safe haven government bonds caught a bid with 10 year Treasuries down 15 basis points to 2.12%.
Lots of geopolitical angst hitting the markets as well, with North Korea claiming to have detonated an H-bomb. That’s after Shiites around the world, led by Iran’s Supreme Leader, denounced the execution of a Shiite cleric in Sunni Saudi Arabia with many calling for the overthrow of the House of Saud.
By the way, Saudi Arabia is considering selling shares in its state-owned oil producer – Aramco. The oil company produces more than 10% of the world’s oil supply. The market cap valuation would be in the trillions no doubt making it the most valuable company in the world.
The World Bank downgraded their forecast for global growth by 0.4% to 2.9% for 2016 and warned of downside risks out of the emerging markets. Still, world growth this year was 2.4% so their base case is for a better year.
There was more good news, the Big Three auto makers had solid sales gains in December. The car makers should report their highest annual sales ever for 2015, shattering the record set in 2000.
And I have to say it, the US jobs numbers were very strong. In fact revisions to the previous two months added another 50,000 jobs. Average hourly earnings were +2.5% YoY, up from 2.3% last month. What’s not to like? It surprised me that the Friday stock sold off and didn’t do MUCH better on these numbers.
Another glimmer of hope came from the FOMC minutes that the Fed released Thursday. Recall that members voted to hike rates in December, but the minutes suggest a dovish-tightening bias. APCM portfolio manager Bill Lierman expects only two hikes in the fed funds rate this year keeping short rates below 1%.
APCM does not buy individual stocks but I thought this JP Morgan comment on Amazon was interesting: “After a difficult 2014, Amazon soared in 2015 (stock up 118%) as investors responded positively to more clarity on its profitable web service business. Amazon now has the same market cap as Wal-Mart, Costco and Target combined, while its revenues and free cash flows are only 15%-25% as high. Amazon’s success is not without precedent; its share of total retail sector revenues and gross profits since 1999 looks eerily just like Wal-Mart’s rise from 1971-1988. Amazons stock price now reflects expectations of 10% to 20% revenue growth over the next 10 years, a feat which Amazon has already achieved but must now replicate on a large scale.” APCM analyst Kirsten Halpin opines “it just shows you that the market loves growth and will pay up for it these days.”
On Sunday the Seahawks begin the playoffs against the Vikings in Minneapolis – outdoors – no dome. The weather forecast has temperatures around zero with chances of -20 with the wind chill. It could be one of the coldest NFL football games ever. Brrr.
Our annual letter and outlook will be hot off the press and off to clients next week. We expect modest returns in 2016 in a low growth, low inflation and still low interest rate environment.
Jeff Pantages, CFA®
Chief Investment Officer