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.
Volatility is on the forefront of our minds as 2015 comes to a close. For the second half of the year we experienced a significant increase in volatility as China concerns slipped into play, Greece stumbled, Puerto Rico tripped into bankruptcy, and our slow but steady market fell into an era of volatility. We expect this era to continue into 2016 as the Fed’s program of rate hikes are projected to continue even as Europe and Japan enhance monetary easing measures. The Kabarec team is working on reducing your portfolio’s exposure to market volatility while maximizing your return.
We have allocated more toward a cash position and chopped some of our holdings that were more susceptible to wild market swings. By effectively taking risk off the table we have placed your assets in a position to capitalize when the market finds stability. Our purpose is to earn you the highest return by investing at the most opportune time. During volatile times it can be difficult coming to a fair valuation on a holding due to firms and individuals investing on emotion and trend rather than true fundamental analysis. Our convictions in investing have always been driven by fundamental financial ratios, key statistics, and performance outlooks as opposed to fear and greed. We will continue to hold steadfast to this philosophy into a volatile 2016.
The New Year will usher in a new election cycle and new policies will shape the economic landscape for years to come. We look forward to the strong possibility of international tax reform. An end result of tax reform would align the U.S. corporate tax code with nearly every other country and enthrall the possibility of corporations repatriating billions of dollars to the U.S. For years, drug and tech companies have stashed around 2 trillion dollars in profits in European banks to avoid taxes but a change in tax policy would allow them to bring that money home. A tax holiday would allow profits stashed overseas to come into our pockets as dividends and into our national economy as the government could invest in additional infrastructure with an added surplus. Corporations would also be able to invest their repatriated profits into plants and equipment which would create thousands of jobs.
Despite a political and volatile 2016 most project a continued bull market. The market experienced correction in August as the bull market reached a level of maturity and built-up excess subsided. Typically euphoria in investor behavior precedes bear markets but we have not seen evidence of that behavior as massive asset flows into bond funds suggest that investors are worried over equities. We are nowhere near euphoria but instead bouncing in between enthusiasm and panic as evidenced in recent volatility.
In a sea of volatility we seek to be your refuge for market insight and guidance. Fear tends to manifest itself much more quickly than euphoria or greed so volatile markets tend to be on the negative side. As the market begins to progress, fear and volatility gradually decline. In 2016 we are hoping for the market to progress its way beyond uncertainty and into prosperity. We will continue to seek to reduce risk and improve performance in the face of uncertainty. With a higher allocation in cash, your portfolio is poised to capitalize more as the market looks for stability in 2016.
As always, if you have any questions, inquiries, or concerns we are here to serve you.
Do you ever wonder where your drinking water comes from? Whether you use a filter or purchase a bottle straight from the mountains of Fiji, it comes from a water reserve. A water reserve can be regulated by dams, laws, and many other entities that account for fluctuations. The draught in California has caused water prices there to spike just as flooding could cause a price reduction. Water is a lot like money, you need both to live and both are regulated.
The Federal Reserve is the Lake Michigan of money. During times of economic hardships or drought, the reserve cuts interest rates which allows money to trickle down through the economy. The Fed is tasked with the large responsibility of not flooding the market with artificial growth but also not starving the market of economic opportunity. Just how Lake Michigan supplies countless other lakes and rivers with water, it is the Fed’s job to supply lending institutions with money. When the Federal Reserve raises the prime interest rate, it cost banks more money to borrow. Those costs are then transferred onto aspiring homebuyers, new businesses, builders, businesses thinking of expansion, aspiring automobile purchasers, and anyone who is seeking a loan.
The water level on Lake Michigan and the economy fluctuate. The last time the prime rate was changed was on December 16, 2008 and it was set at 3.25% where it currently stands. During the time of economic expansion in 2005-2007, the prime rate varied from 5.25% to 8.25%. Quantitative easing set in as the economy plunged in 2008 and the prime interest rate was set at a historically low level. The rate banks borrowed at just two days ago was the lowest since 1955.
10 Year History of the Prime Rate
Source: Federal Reserve Board, Proprietary Bank Surveys 2015
Wednesday, Janet Yellen and company unanimously approved a .25% rate hike. Your portfolio most likely experienced a bounce in an upward direction as we have been prepared for a rake hike for months. We planned on capitalizing off of a rake hike by adding positions in financials. Our strategy paid off and we foresee future gains as the financial sector is strong and additional rate hikes are likely to come. The market as a whole launched off as Wall Street celebrated Yellen’s decision to raise the interest rate in an accommodating and gradual manner. The move to raise the prime interest rate is symbolic of our recovery and a testament to the positive fundamentals of our economy that has us cautiously optimistic about 2016.
We are comforted by Yellen’s promise to raise the interest rate in the future in an accommodating manner but we remain vigilant. Thursday we experienced a pullback and there may be added volatility in the following week. Today the market plunged as options contracts expired and the oil forecast was worsened for 2016. Overall, this has been a volatile week for the S&P 500 but we finished almost where we started with nearly 8 points down at today’s close since Monday. As always, if you have any questions, inquiries, or concerns we are here to serve you.
Thank you for your continued trust and support.