Monday, February 1, 2016

As January Goes So Goes the Market

Despite a big Friday rally, the S&P 500 finished the month -5.1%, NASDAQ -7.9% and the Russell 2000 -8.6%. This result was the 7th worst start for U.S. markets since 1950.
January's global market action caused Bank of Japan head, Mr Haruhiko, to ride to the rescue on the last trading day of the month. He stated "there's a risk recent further falls in oil prices uncertainty over emerging economies, including China, and global market instability could hurt business confidence and delay the eradication of people's deflationary mindset. The BOJ decided to adopt negative interest rates ... to forestall such risks from materializing."
According to Howard Silverblatt of S&P Dow Jones, the old adage, "as January goes, so goes the market" has been correct 72.4% of the time.
Volatility in China's markets, combined with a continued plunge in oil prices and worries about U.S. and global growth all hurt stock prices in January.
The 10 year Treasury note finished with a 1.92% yield. Similar sovereign debt maturities are 0.32% in Germany and 0.09% in Japan.
Negative rates in Europe and Japan will likely persist for some time. U.S. treasuries and municipal bonds were among the few asset classes that made money for the month.
Bank stocks were particularly hard hit as the KBW Bank index of 24 companies declined 13% in January despite hopes of higher rates from Janet Yellen's Fed. This type of decline is disturbing and reminiscent of 2007.
Many investors have concluded, the December FOMC rate hike was a mistake. U.S. and global economies are weakening, credit spreads have widened, so why raise rates?
The 4th Q GDP in the U.S. was up 0.7% with personal consumption expenditures up 2.2%. This is the fourth year in a row where GDP growth has fallen short of Fed estimates.
Where is the increase in consumer spending? We have seen a 65 % drop in energy prices that puts more cash in most pockets.
In Q4 2015 some 47% of personal consumer expenditures went to higher healthcare costs, in part the effect of Obamacare.
With U.S. GDP growth stuck in second gear and Emerging Markets, including China responsible for 46% of Global GDP growth over the past 5 years, confidence in central planning and central bank printing is waning.
On a contrary note, market sentiment as measured by Investors Intelligence shows 29.2% Bulls and 35.4% Bears, often a point from which market rallies begin. Formerly forlorn gold, rallied 5.3%, indicating fear has returned, but not fear of inflation.
With the S&P 500 down to 15.5 times forward earnings of $124.58 and 16 times trailing earnings, P/E's on the index have gone down.
One problem however, is that Factset expects an earnings decline of 5.8% in Q4 when all companies report. Even at the sector level, 8 of 10 sectors recorded a decline in bottom up EPS during January.
The strong U.S. dollar is a constant headwind for U.S. multinationals earnings.
The fact that 2016 is an election year does not appear to be helping markets with Iowa primaries just getting underway. Outcome for the 2016 elections are about as clear as the skies over Beijing.
With Japan's latest monetary move, China is more likely to let it's currency drift lower to aid her trade competitiveness. This will no doubt export deflation to the rest of the world, including the U.S.
While we remain skeptical that the current decline has run it's course, 5 of 6 weak prior Januaries have resulted in gains for the rest of those years, though not necessarily a positive year.
We remain apprehensive of further tinkering by central bankers who seem to be very low on ammo after many years of low rates. How much lower than zero can rates go and who does it help?
The world does not need more easy money, the world needs growth. While the U.S. seems to have a love affair with regulation, taxation and litigation, Europe and Asia tolerate a different brand of government tinkering with free market forces.
While QE has helped financial assets rise until recently, the positive effect on GDP has been fading as global growth forecasts are now under 3% according to the World Bank.
We appear to be stuck in a widening  trading range from 1820 support to 2134 resistance for the S&P 500.
Until oil stabilizes and a recession is no longer on the horizon we expect continued volatile markets.
Best Regards,
Doug Coppola
John Coppola

February 1, 2016


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