The market tumbled again today as day traders and gamblers alike woke up to an expiration date on the high risk business of options. More than 11 million options contracts were traded by noon as option traders faced two very difficult choices, to buy more expensive protection for their wagers or sell outright exposure to stocks. Both actions added selling pressure to a market already facing extreme fear from investors who are concerned with an oil crash and a mixed performance by the retail sector.
Oil continues to plummet which may force many domestic U.S producers out of business. Sanctions are set to be lifted on Iran this weekend which only accelerates a supply glut rocking the oil industry. Tehran and many others in the Middle East are desperate for cash but it seems Saudi Arabia is looking to bankrupt many small US oil producers and raise prices in the future. Job deceleration in many energy driven regions in the US has caused turmoil in housing markets such as Texas, the Dakotas, and Wyoming. These troubles combined with mismanagement in the retail sector have investors worried about today’s performance.
Executives at big box stores were unable to find a reliable meteorologist and blamed warm weather for another disappointing sales season as shelves were overly stocked with coats, hats and scarves. As consumers change the way they shop Macy's aims to cut jobs nationwide as sales continually disappoint. Walmart also announced that it will shut down 269 stores as people are buying from the comfort of home with a mouse instead of driving needless miles to deal with the masses. In changing times, it is critical for businesses and executives to keep pace. Netflix is poised to produce solid earnings and online retailers continue to profit on ever-changing consumer trends. Fixed income funds, dividend payers, and high quality equities had our curiosity but now have our attention. Your portfolio has likely added two positions in a securities and income fund as well as a shock absorber fund to minimize risk and capitalize on growth. Our preferred Schwab securities fund has outperformed a volatile market while paying a dividend. We are also excited about our shock absorber fund that features commodities. This commodity driven fund has the potential to reduce overall portfolio risk and provide returns in a down market. The fund shown below has the ability to both capitalize on both rising and falling prices.
Part of our mission at KFA is to keep you informed and updated on market movement and your portfolio. Should you need any advice, guidance, insight or help please feel free to call us. We are always here to serve you and your portfolio. Thank you for your continued support.
By: Lisa Thuer - Senior Trading and Research Specialist
We are sure that all of you know by now, the US stock market has started the New Year, with the worst performance in history. Gloom and doom, is once again the rage on Wall Street and the fear mongers are out in full force, speaking on the radio and television.
One major international bank, The Royal Bank of Scotland, has made the bold call to sell “everything” based on world economic conditions. On the contrary, Morgan Stanley has stated that it remains optimistic and to “keep calm and carry on”.
What should we do as investors in the climate of uncertainty and volatility?
There are many unknowns as we head into 2016, such as potential Federal Reserve interest rate hikes and slowing global economy, also, will China go into a deeper recession.
However there are some known factors, such as:
- Inflation remains low
- Interest rates remain low
- Energy prices are low
- The employment picture is improving
- The bond market is stable
- Major corporations have strong balance sheets
As we write this letter, the fourth quarter earnings reporting season has just begun. We do expect earnings to be reasonably good, with some of the earnings based on somewhat lower expectations. These good earnings should help stabilize the shaky market.
At KFA, we are not going to let fear pull us into chaos. We will continue to focus on high quality investments and our diversified asset allocation strategies. For most clients we have purchased defensive positions or portfolios stabilizers, as well as selling non-core underperformers.
As we move forward, this market correction may be an opportunity to purchase stock and bond investments at reasonable prices.
Please call us if you have any specific concerns, we are always happy to hear from our clients. Thanks you for your continued confidence in us, we wish you a prosperous 2016.
Welcome to the New Year and to a new era of opportunity. The S&P 500 closed 2015 down 0.7% and the Dow Jones finished down 1.02% as growth was hindered by China, oil, terrorism, and speculation on the duration of interest rates. The same S&P market finished up over 10% in 2014 and finished 2013 up nearly 30%. Many of the same favorable fundamentals that gave us positive years in the past are still present. We are not expecting a year that the market soars but it would be extremely surprising and concerning if we finished 2016 in the negative. The coming era will be determined by how businesses, governments, investors, and institutions react to change.
China’s economy continues to be the chief concern amongst investors. After a $590 billion dollar selloff in the Chinese stock market their central bank stepped in to shut down trading. Securities regulators held in place a selling ban on major shareholders that was set to expire this week and government fund managers have been ordered to purchase local stocks. Chinese officials continue to preach growth, prosperity, and resilience but actions speak louder than words. The government’s action to intervene in the market is a testimony to concerning weaknesses. China has abandoned free market principles in order to save face while the United States continues to slowly but surely trudge forward.
If you look back at August, we experienced a similar market slowdown caused by the same Chinese regime that tries to command an economy and influence a market named the Shanghai Composite Index. Investors shrugged off Shanghai’s downturn in September and October yielded one of the best performance months of the year for the S&P 500. While traders ran wild with fear and negativity in August, investors saw opportunity to invest and reaped the rewards in the following months. As a member of the KFA family, you are an investor and not a day trader. Our outlook for January is continued turbulence and possible distress on market performance but beyond the foreseeable future there is little reason to believe that an improving U.S economy and market system will under-perform.
If you read into the headlines the slowdown from China will cause a world collapse. Renewed fears of a China collapse prevented Santa from visiting the markets in December and persist today. The truth shows that just 0.9% of the U.S. economy is generated through sales to China. Very few economies account for more than 3% of gross sales to China. History shows that China is acting and performing like Japan did in the 1990s with growth almost solely based on exporting. By 1990, Japan had been growing at an average rate of 6.5% annually for 35 years – almost as fast as China. Since then, Japanese growth has been negligible which surprisingly hasn’t made much difference to everyone else. The 1990s, and the first part of the 2000s were a very strong period for the rest of the global economy. The fact that the world’s third largest economy was in permanent recession didn’t make a great deal of difference then and it does not today.
We are still at a crossroads of volatility between negative momentum and positive fundamentals. Negative momentum will eventually erode as it is based on headlines, emotions, and swings rather than fundamentals and facts. Corporate earnings season kicks off Monday and early projections by analysts show many U.S corporations in the positive. Inflation remains at historic lows and a measure of weekly jobless claims sits near its lowest level ever. Wages are modestly increasing and low prices at the pump leave more dollars in your wallet. International commotion has harmed investor confidence but KFA remains almost exclusively invested in the domestic U.S market. Our country, economy, and markets remain beacons of stability and hope for those around the world.
Listed below are the Charles Schwab Corporation Sector Views:
Unfortunately, our way of life is constantly threatened from North Korea to Iran. In a troubling and conflict driven world, the United States has increased its defense budget and we have added to our allocation in the defense sector. We will be adding a holding meant to serve as a shock absorber and capitalize on recent market downturn. Additional trades may be placed in the coming days to protect your portfolio and to capitalize on devalued quality equities. Our largest asset allocations remain in healthcare, financials, and technology which are poised for growth into 2016.
KFA will continue to keep a steady watch over financial events and if you have any questions, inquiries, or concerns please call or email us.
By: Lisa Thuer - Senior Trading and Research Specialist
New Year, new beginning for the markets, right? Not so fast. The past two days have felt like August all over again on the first two trading days of 2016.
Hangover from 2015
2015 was less than stellar in comparison to the past several years. Uneasiness remains as to how 2016 will begin and play out. The Fed began to raise the long anticipated rate by .25% bases points which really is not a big deal in the big picture. Now the concern is will Janet Yellen, the Federal Reserve Chair, raise rates four times in 2016 as stated in her press conference in December, 2015. Also, with global growth slowing and a strong dollar – how will this affect corporate earnings?
China market halts trading
China markets halted trading when they dropped 7% on news of weaker-than-expected manufacturing data and a falling currency. Again, as stated previously this summer, the correct GDP number is really unknown which leaves a lot of room for speculation on the growth of the economy in China. But again, China has been slowing and this is not new news.
Geopolitical tensions heat up
Saudi Arabia decided to cut ties with Iran on Sunday. Will this lead to oil disruption or will the tension send oil prices even lower?
Weak ISM data
On top of all the other bad news that came out overnight, this morning it was reported that the index of national factory activity fell fractionally and also construction spending declined slightly.
What all this means for your portfolio. Volatility will become the new norm for the stock market. “Buy low sell high” but be picky and choosy needs to be added to that phrase. The U.S. market held up relatively well on Monday in comparison to other markets especially China. China was down 7% and the U.S. Markets closed down only approximately 1.6% in comparison, showing strong resilience. The Chinese market that is affected is the A Share Market which can only be traded in China. Some of the selloff could be noted as “misery loves company”. Oil and the energy sector continue to weigh on markets. We are looking for the energy sector to find a bottom and some stability but at least in the meantime it is money in your pockets, as consumers. The fear of four rate hikes in 2016 is on many investors’ minds. Janet Yellen will keep a close eye on the global economy and raise rates as necessary and has stated she will do so as the economy improves. We will wait and see as corporations begin to report earnings, beginning in the next month, to give us guidance as to how the economy is doing as a whole. To put things into perspective, as stated, “Netflix subscribers are not going to stop their subscription because the stock is down 4%”.
KFA’s team will continue to watch closely and look for opportunities as they arise. In the meantime, thank you for your continued confidence in our team.
In spite of largely unchanged market fundamentals, extreme volatility gripped the market this morning and is likely to persist this week. The DOW Jones saw an overall drop of 1,000 points within 10 minutes this morning. This morning appeared to be a market going mad, but NOT a US economy going bad.
Here is a snapshot of the time sequence that led to the DOW's market drop.
The first trades to drive down prices were automated trades induced by software algorithms, followed by trades to meet margin call requirements caused by lower prices. After this, we saw periods of selling as well as people buying in to find a good deal.
Stepping back to see what fundamentally changed in the course of the first ten minutes today we find nothing. There were zero new reports regarding the state of our economy. We have been concerned with the economic state of China which is why we have been selling positions over the past couple of months and are holding an unusually large cash position. We are watching closely to see if opportunities to buy present themselves or whether we continue to hold cash with our cautious stance. We will be watching to see how overseas markets perform overnight. Over the next several days we will be watching for signs of fundamental changes that may chart the course for the remainder of the year.
We will be listening to economic data reported later this week such as GDP estimates, pending and new home sales, and durable goods orders to name a few. Uncertainty still remains around a Fed rate hike as they have not set a date, saying it is data dependent. Although a large decline in stock prices alone does not mean the Fed will halt their plans to begin increasing rates.
We still hold a long term view for our current holdings and do not want to make irrational daily moves to lose sight of your long term goals.
As always, we appreciate your confidence and support in us. Please feel free to call should you have questions.
Your team at Kabarec Financial Advisors, Ltd.