After moving erratically higher in the last two weeks of January (mainly on stability in the oil markets), stocks lost ground this week. The S&P 500 ended the week at 1,880, down 3.0%. The Dow was off 1.5% to 16,205. Foreign equity markets fell in line with the US. The US dollar (DXY) slid 2.7% over the week against major currencies as investors pushed back expectations of Federal Reserve rate hikes in the US. Bonds continued to rally pushing yields down another eight basis points over the week to 1.84% on the 10 year Treasury. The yield on 10 year Japanese government bonds is now 0.03%. Amazing.
Fourth quarter corporate earnings have been disappointing. With 314 of the S&P 500 companies reporting, Bloomberg puts earnings down -4.5% YoY. Granted they’re up +2.3% excluding the energy sector, but the numbers are still pretty soft and analysts are lowering their 2016 estimates. This has no doubt contributed to weakness in stocks.
January’s jobs numbers out Friday, while solid, were weaker than expectations. Still, headline payrolls rose 151,000, the unemployment rate drifted down to 4.9% and average hourly earnings rose 0.5% (2.5% YoY). I thought it was a good number and suggests decent personal income and industrial production numbers in the coming weeks. Wells Fargo notes: These gains represent solid trends supporting continued economic growth and certainly do not signal recession.
You often hear that a weaker dollar will boost oil prices. Why? It makes oil (priced in $) more affordable to foreign buyers, which can boost demand and ultimately the price. Of course the opposite is true and the strong dollar has weakened oil demand by foreigners over the past 18 months contributing to the fall in oil prices.
Speaking of the dollar, another impact of dollar strength has been to make it painful for global borrowers to pay down their dollar denominated debt. This has contributed to shakiness in the emerging markets in particular.
Good News: Retails gas prices are down to $1.77 a gallon in the lower 48 and 30 year mortgage rates are now 3.69%. We think investors are underestimating the positive effects of lower oil prices.
Fed Chairwoman Janet Yellen is before congress next Tuesday and Wednesday for her semiannual testimony on monetary policy and the economy.
Madoff: Charmer, Egotist, Fiend, Swindler. The ABC two part movie Madoff aired this past Wednesday and Thursday. It did a pretty good job depicting the $50 billion Ponzi scheme Bernie Madoff perpetrated on investors for over 20 years. Madoff was a master con man – confidence man. He never looked desperate for your money and portrayed an aura of “exclusivity.” He never offered sky high returns, just solid consistent gains year in and year out. Moral of the story – if something sounds too good to be true it probably is! (BTW I do a presentation Robbing Peter to Pay Paul: The Schemes of Charles Ponzi, Bernie Madoff and Rajean Bonham. If you have a group that is interested just let me know. Bonham perpetrated the largest Ponzi scheme in Alaska history up in Fairbanks.)
Super Bowl factoid: Last year the Super Bowl took in $345 million in ad revenue. It is a single game, yet it took in 44% more ad revenue in 2015 than the five games played in the World Series and 79% more than the three games of the NCAA’s Final Four basketball tournament.
Enjoy the game (and commercials) Sunday. Go Broncos!
Jeff Pantages, CFA®
Chief Investment Office