Ground Hog Day
If the market actually follows January’s lead, as it does according to Wall Street lore, then it will continue to be a very bumpy ride this year. However, it could also follow the script from just last year too. Stocks fell 3.5% then as well, before regaining their footing and putting in a respectable year. Of course, this year is different. Falling energy prices are fueling worries about deflation. Greece (remember them?) is back in the news following their election, heightening worries over a Euro that may fall apart. Economic growth was poor last quarter. A year ago the US shivered in the polar vortex that actually saw first quarter GDP fall. So much has changed in a year, but the song really does remain the same. This week we’ll be worrying about the employment report, which should continue to show well above 200k in new jobs. The “booming” employment will be tempered with losses of jobs in the energy sector in favor of lower wage jobs. Wage growth will be looked at closely following a surprising gain in consumer spending in the GDP report. The big questions looming for the markets are how much longer can the US be the port in a global slowing storm? Will global slowing and a stronger dollar push earnings down? (We are seeing some evidence of this already). On the flipside, will lower energy prices sow the seeds of a much better second quarter by lowering input costs for many businesses?
What is surprising with the market decline is the relatively “orderly” fashion in which it is occurring. Many of the market internals are nowhere near “buy” ranges and some are closer to overbought than oversold levels. When comparing this year to last January, it is clear that the markets are having some trouble getting started. Last year, the markets moved over 90 points in twelve sessions (including Feb 1st). This year it has been 15 times. Last year, the bottom was on Feb 1 st and this year the bottom will be …? Some of the better indicators within the markets have been the net number of advancing to declining stocks. While each day has been relatively one sided this year, the overall advance-decline line has remained relatively stable near all-time highs. The same is true for the volume calculations. Unlike last year, volume was expanding on the declining days, however this year there has been a better balance. By no means do we think the volatility is over. We are expecting a volatile first quarter for the overall markets that could lay the groundwork for a much better middle part of the year. Economic growth concerns will likely persist much of the year, however still very easy monetary policies from global central banks should keep investors buying stocks instead of bonds.
US government bonds have returned as much in January as they would in a very good year. Not that corporate bonds are any slouch, but the star has been the safety of US bonds. The bond model has been positive since October ’13, indicating that yields would be generally declining. It continues to point that way. The economic data is also pointing that way, as weaker corporate earnings and still negative commodity prices may make it tough for the Fed to raise rates by mid-year. Safe haven investing in bonds continues to be the trade of choice, but for how long? Utilities and REITs both did poorly on Friday and may signal at least a short-term end to lower rates. What a long and strange trip January was, with the markets rocking and rolling all month long. We are finally starting to see diversification actually work, as international and emerging markets bested the SP500 in January. While one month does not make a trend, the international markets have been very inexpensive as compared to the US and have suffered from a strong dollar. REIT investments also did well as a bond surrogate investment, rising by 6%. Small cap and commodity based investments struggled during January. Small cap stocks remain even more expensive than the already expensive SP500, while commodities have suffered from the energy rout. While we have maintained our international investments, it may be time to bump up the exposure some in the months ahead as a way to buy very good companies at very inexpensive prices. Patience, as with all investments, will be important.
The monthly jobless report will be released on Friday, giving investors something meaty to chew on next weekend. However, this week will be filled with more earnings reports and worries over slowing global economies. Expect that volatility will continue at least for a while longer. Bond investors can hold tight. Low interest rates look to be here for quite some time as inflation worries are on the far back burner.
The opinions expressed in the Investment Newsletter are those of the author and are based upon information that is believed to be accurate and reliable, but are opinions and do not constitute a guarantee of present or future financial market conditions.