We All Have Dreams

PaulNolte-2As the markets in the US close for the Martin Luther King holiday (and are open around the world) an appropriate quote might be “we must accept finite disappointment, but never lose infinite hope.” The markets will go up, eventually and no they won’t go down forever. Investors have been accentuating the negative and viewing the glass as half empty. This is not to say there are not issues around the globe, but the market’s reaction to them is a bit overdone at this point. Fears of a recession in the US are overblown. The economy continues to bump along around 1.5-2% growth and has been on a modest trajectory ever since the economic lows of ’09. Commodity prices are falling, indicating global growth is also slow.

Interestingly, in the US new vehicle sales for heavy trucks (not known for fuel economy) continue to grow. Lower fuel prices will spur demand. We will get much more data this week as earnings season gets into full swing, China releases their growth data and important home sales information in the US. It is always darkest before the dawn.

The small afternoon rally on Friday had the initial look of a successful “test” of the August bottom. Investors were not interested in holding positions ahead of a three day weekend when news items could change the outlook of Tuesday’s US
open. How negative is sentiment on the street? When looking at analysts revising their earnings estimates, they are cutting estimates much more than raising them. This quarter is among the worst since the ’09 bottom. When analysts are this negative, the markets tend to perform well, as there is little left for “downside” surprises. Even individual investors are very negative. Going back nearly 30 years, today’s (AAII) sentiment readings are lower than just a handful of times. In all but one case (1/10/08), the markets were up over six months later, averaging nearly 10%. All of this doesn’t mean the markets don’t continue their downward trek this week, but it does point to the fact that we are much closer to the end than the beginning. We will be looking for more participation in market rallies and improving performance from smaller stocks to help indicate the markets are ready to push higher in the weeks ahead.

Investor fleeing the falling stock market rushed into treasury bonds, pushing yields back down to near their lows of the past two years. Even those guessing about the Fed rate increases are beginning to “guess” the Fed will have to cut rates sometime this year given the turmoil in the markets and concerns over economic growth. We have been on the record over the past three years saying the Fed can’t really raise rates. The lackluster economic growth in the US and around the world as well as high debt levels, especially at the government level does not warrant rate increases at this time. It would be much better if debt levels were brought down (over time) to historically normal levels before embarking upon rate increases. So far, the only lever being used has been monetary policy, fiscal policy has been notably missing over the
past 5-10 years.

As energy prices decline on a daily basis, calls for crude, now just under $30/bbl, to fall to $10 are beginning to come out of the woodwork. When prices were rising, the same institutions were calling for $150+/bbl before prices crumbled. So Wall Street has been notably bad at predicting turning points for markets, instead assuming the trend that has been in place stays in place for the foreseeable future.

Interestingly, a few energy stocks are showing life and moving up, even as crude prices drop. The largest, Exxon Mobil (XOM) has performed better than the SP500 going back a year! Other large “integrated” energy companies are at their best levels vs. the SP500 in six months and higher than their lows of Sept/Oct of last year. While there will still be pain in the sector in the months ahead, the leadership by the majors in the group could be signaling just maybe we are much closer to a bottom in energy prices than some may think.

What was missing last week was a huge selling day, when everyone was trying to get out at any price. That is usually the signal of a short-term, if not long-term bottom. We are seeing signs that the heaviest of selling may be abating some, but given the jittery markets, little is certain until we see better trading. We will be watching small cap stocks and energy for signs of changes in the overall markets. Bond investors will continue to be the beneficiaries of fear in stocks. Yields should not be moving that much higher this year as economic data is not that robust. 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.