Pessimism Reigns Supreme… Well, Maybe NOT! - Alaska Permanent Capital Management


Pessimism Reigns Supreme… Well, Maybe NOT!

Jeff_PantagesIt’s a rout. Hopes dashed. Dreams deferred. By Wednesday, stocks were down over 10% year to date and off 15% since the May 2015 highs. The worst start to a January ever. The headlines were ugly. Bonds provided some “insurance” in diversified portfolios but were only up 2 or 3% year to date compared to a 10% decline for equities. WTI Oil hit $27 a barrel. That was Wednesday.

Oil snapped back +10% on Thursday and Friday after EIA data showed that inventories grew less than expected. It ended the week close to $31, about $1.50 higher than where it began. Stocks rallied hard Thursday and Friday with the S&P 500 closing at 1,907; it was up 1.4% this week but remains down 6.6% for the year.

Most global equity markets ended the week higher erasing steep losses early in the week. The Euro Stoxx 600 ended the week up +1.3%, while Britain’s FTSE gained +1.8%. After being pummeled for several weeks, the Toronto stock exchange gained +5.4%.

Bond prices rallied early in the week and then gave back the gains ending roughly unchanged. The 10 year Treasury closed Friday at 2.05%.

Falling oil prices, China worries and thoughts of central banks running out of ammunition (they are at zero bound already) have unnerved the markets, but it was/is way overdone. Besides it’s really a supply glut in oil that is causing prices to fall, much more so than a lack of demand, which in fact is increasing, by the way. Wells Fargo notes “despite the financial markets’ volatility, our (positive) outlook for the U.S. economy remains intact.” The chart at the bottom of the EYE suggests that a bad January does not necessarily mean a bad year for the markets.

Lots of data to chew on. The IMF cut their global growth forecast from 3.6% to 3.4% for 2016 as China slows. They also cut their forecast for 2017 from 3.8% to 3.6% and warned of downside risks.

China’s GDP increased by 6.8% in the fourth quarter compared with Q4 of 2014, the slowest pace since 2009. Growth is expected to decelerate to 6.5% this year. It’s still very strong.

The Congressional Budget Office (CBO) now projects the US economy will grow at 2.7% in 2016 and that the unemployment rate will fall to 4.5% by year end, versus 5.1% now. The federal deficit will grow from 2.5% of GDP last year to 2.9% in 2016, the first increase since 2009. This will add to growth in 2016.

On Thursday, the ECBs Mario Draghi said the central bank was willing to consider additional easing in March in light of recent global economic and market developments that create increased downside risk to growth and inflation. Hence ISI below…

ISI: The Central Bank Cavalry Is Coming. “We believe that the dovish ECB meeting today is a prelude to further dovish action from the Fed and BoJ next week. We anticipate that the Fed will signal a “time out” on further hiking and sees a higher than consensus probability – maybe now greater than 50/50 – that the BoJ will increase QE with additional equity ETF purchases.” This idea seemed to stabilize the markets.

It’s earnings season. Bloomberg reports that 73 of the S&P 500 companies have reported Q4 earnings. YoY earnings for these companies are down 2%, while 75% reported positive surprises vs. expectations going in. Clearly, earnings need to improve for stocks to do better. The consensus forecast for 2016 is +8%, but it may be tough sledding.

The world economic forum meeting at Davos, in the Swiss Alps, began this week with its agenda entitled “Mastering the Fourth Industrial Revolution” – as the rich and famous and politicians, discuss how best to respond to the rapid technological change that is disrupting many industries. Apparently APCM’s invitation got lost in the mail….again.

Meanwhile, Puerto Rico’s financial situation is collapsing. It has defaulted on some bond payments, is diverting revenues pledged to repay other debt, and is delaying tax refunds. The commonwealth has more than $70 billion in debt more than any state except NY and California. It says it will have $24 billion less than needed over the next decade to repay principal and interest. Recall PR debt is triple tax exempt and owned by many municipal bond funds. APCM owns no PR bonds.

By the way, municipals outperformed other debt in 2015 and now are fair value at best compared to taxable corporate bonds, especially in the front end.

In an article titled “Where’s the Payoff for Active Investing” Morningstar takes a look at equity fund performance since the market high on May 22 through last Friday. It’s not pretty. It is hard to beat indices, that’s why we favor low cost index funds. If you can’t beat’em, join’em.

Gas at the pump is now around $1.90 a gallon in the lower 48. Closer to $2.25 here in Anchorage. Mortgage rates are down to 3.75% for 30 years. Both are a big positive for the economy.

Jeff Pantages, CFA®
Chief Investment Officer 



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