The 7.1 earthquake early Sunday gave Anchorage residents a small taste of what it has been like in the equity markets for the first few weeks of the year!
Stocks gained ground this week (S&P 500 +1.8% and the Dow +2.3%) but the S&P 500 ended the month down 5.0%. The Euro Stoxx 600 was up 1.5% this week but ended the month down 6.7%, while the Nikkei rose 1.3% from Monday to Friday but was down 8.8% in January. The volatile Shanghai Composite Index lost 6.1% for the week and was down 23.6% in January.
Bond prices rose and yields fell to 1.92% on the 10 year Treasury, which was down over 10 basis points (bps) for the week and down almost 35 bps since year end.
WTI oil hit a low of $26 a barrel on January 20, but subsequently climbed to end the month around $33.50. That’s still a 9% decline since year end.
The latest batch of quarterly earnings continues to underwhelm. Some would dub the –2.6% change in YoY Q4 earnings posted so far by 201 companies in the S&P 500 as a “profits recession” and that is fair enough. However, it’s also fair to note that without the bloodbath in energy, profits are up – although only +1.4% YoY. And of course since one-half of S&P 500 companies revenues come from overseas, the 10% appreciation in the dollar last year knocked 5% off of overall top line growth. Will that repeat in 2016? Probably not.
The FOMC met Tuesday and Wednesday and may be backing away from hiking rates four times this year in light of market volatility, the strong dollar and tepid inflation. The market probability of a March rate hike is only 16% now, down from over 50% at year end. The two year Treasury yield has dropped from 1.05% to 0.78% since year end. We will know more about Fed policy when Yellen testifies before Congress on February 10.
The Bank of Japan unexpectedly pushed short term rates paid on bank reserves into negative territory at -0.1% in an effort to spur more lending. The idea is to weaken the yen, raise the price of imported goods and boost inflation in the world’s third largest economy.
Friday morning we learned that the U.S. economy slowed in Q4 to only 0.7% growth. The economy had advanced 2.0% in Q3 and 3.9% in Q2. But it was mainly due to weak exports and a drawdown in inventories which is probably temporary and will eventually stabilize or even rise. The economy is okay and growth is steady, but admittedly subpar.
Iraq’s oil minister offered that he “saw signs” that Saudi Arabia and Russia were more “flexible” now on supply cuts. A few OPEC members are making noise that if other non-OPEC members cut production they will too. Don’t hold your breath. We are seeing once again that a cartel that holds prices above market levels can do so for only so long before cheating and market forces push prices down, leading the cartel to abandon its quotas to regain market share, exacerbating the drop in prices.
FT headlines: US shale groups slash capital spending. Continental, Hess and Noble react to collapse in crude oil prices. It’s been said that the solution to lower oil prices is…lower oil prices. Producers slash production so supply falls ultimately bringing supply and demand into balance. U.S. oil production is expected to drop by 1.2 million barrels per day, or 12% from its peak in April 2015, by the end of 2016.
There is no shortage of negative headlines. Check out this post for some positive news.
And how about this WSJ headline: Fears that a global growth slowdown could derail the Eurozone’s fragile recovery are largely unfounded. We agree and think Europe and Japan equities could do better than the U.S. over the next few years.
S&P upgraded Greece to B- from CCC+, with a stable outlook. Still, we would not rule out more turmoil in Greece this year, including unrest over the refugee crisis.
Our Alaska Investment Management Society group had a nice dinner with BCA strategist Jim Mylonas on Thursday. The Bank Credit Analyst is a 60 year old research firm that has provided big-picture insight and analysis of major investment trends, covering equities, fixed income, currencies and commodities. I have subscribed to them on and off for over 30 years. They are good.
BCA has been quite negative on economic growth and are defensive with regard to the equity markets, (emerging markets in particular). They see the end of the “debt super-cycle” very much in play and too much debt still a headwind for global growth. They believe in the secular stagnation thesis. They think longer U.S. bonds are okay and help diversify balanced portfolios.
Several of us here at APCM attended the AEDC forecast luncheon. Bill Popp and his crew always do a great job. I guess that’s why it keeps selling out with over 1,500 attendees! A summary of their forecast for Anchorage is here.
Friday morning I couldn’t sleep so I headed down to my favorite 24 hour diner for “the short stack.” It’s 5 AM and a disheveled homeless man walks in and whispers to the waitress, she nods okay and 2 minutes later returns with a small box. I had to ask her, “Was that guy homeless? Did you just give him a free breakfast?” She says, “Yes, I think it must be hard for them to come into the restaurant and ask for food. It doesn’t happen often but when it does, I just feel helping out is the right thing to do.” She pays for it herself. Really. There is special place in heaven for people like this. Or at least she gets to go to the front of the line!
The 2016 presidential primaries kick off next Monday with the Iowa caucuses. Another ten months of this. Ugh.
Jeff Pantages, CFA®
Chief Investment Officer