As a supplement to my Webinar last week, here's an abridged version of my analysis and reaction to the first quarter of 2016.
Earnings season is upon us
We are knee-deep in earnings season, and all I can think about is what a difference a quarter makes. 2016 was the worst start to a year in the US financial markets ever. Ever.
Three months ago some market watchers were calling for a 2008-style downturn. Many others were saying that our country was on the verge of an economic recession. And these were very experienced investors and money managers. There were even a few very surprising calls from a top financial media outlet and head investors at large financial institutions that it was time to go to cash. At the time, though, both novice and experienced investors were forced to make tough calls to stay invested or not. After plummeting well below 16,000, the Dow Jones regained its footing and crossed the 18,000 mark again recently.
So what happened? Were things really that bad, and have they really improved that much? As we have said time and time again, the market dislikes uncertainty more than anything. 2016 started with massive concern about China and a potential economic collapse there, oil’s continued fall to prices into the mid-$20/barrel range, and worries that the Fed’s increase in interest rates would tank the stock market and possibly the economy. It was like a short-term self-fulfilling prophecy.
Now that the US stock market is back on track, we have to look at the very same data that caused panic in the streets and ask ourselves why the market has had such a big swing to the upside. The significant and swift stock market rebound is a great sign for overall market health, but investors should also know that volatility increased last fall, and it is likely here to stay for the next 24-36 months at a minimum. While we have been pleased with the recent rebound, it was widely unexpected from either bulls or bears, and it is one of the least loved rallies I’ve ever seen. Instead of creating a reassurance that we are in a good place, it has instead caused many market watchers to wonder whether we are again at the top of the roller coaster.
One of the reasons for the rebound is that thus far, US company earnings have either beaten expectations or have come in as expected. However, it is important to note that many companies lowered expectations in the first quarter on purpose, so that they could beat expectations. While positive earnings are an indication that companies are performing well, we may also be seeing average earnings that were carefully announced, instead of true growth. While the market is currently calm, we do anticipate choppy trading in the market that may still make investors nervous in the short-term.
In related news…
The Fed: I believe that we are now too close to the election for the Fed to continue to raise rates. There is also no economic motivation for them to do so right now. Many analysts are still calling for 1-3 more hikes this year, but I will be surprised to see that happen. Nonetheless, if you are considering taking out any sort of long-term loan, whether through a new home purchase or refinance, now may be a good time to do it.
Fixed income (aka bond market): Various parts of the fixed income market performed better than expected in the first quarter, but I anticipate that the 2016 return will be similar to 2015. If we believe that the Fed will hold rates steady this year, then the major threat to fixed income is off the table for 2016.
China: We would be wise to get used to China scaring the global markets with ongoing missteps as they convert from a manufacturing economy to a consumer economy. It will be better for all of us when they do, but it will take some time to get there (think 5-10 years). Investors should not overreact to this type of news, especially because these headlines cause short-term panic but have not yet caused any long-term change in the markets.
The US dollar: The strong dollar has caused problems for US companies that export goods, as it makes those goods more expensive to consumers in other countries. The dollar has lost some value of late, but it is still very strong against other major currencies.
Oil: While oil as a percentage of the economy is much smaller than the housing market, the stock market decided to join oil on its freefall at the start of the year, as if oil could cause the same sort of damage that the US housing market did in 2008. It doesn’t make economic sense, but it does make confidence sense. Now that oil has started to rebound out of the $20s and into the $40s, the market has rebounded as well.
International economies and markets: The IMF (International Monetary Fund) continues to lower its expectations for global growth, which is a concern to long-term investors. Financial market growth is due to the success of companies, and companies succeed when consumers are confident enough to buy goods and services. If economies aren’t growing, it will be very difficult for stock markets to sustain growth.
NIRP: You know, Negative Interest Rate Policy – NIRP is the new buzzword in the financial press. While it is fun to say, it is a horrible policy. You might think to yourself, “Huh? Negative interest rate policy? How does that work?” Market watchers around the world are asking the same questions. Negative interest rates mean that savers actually pay the bank to deposit their funds. This policy – which is intended to motivate savers to move their funds into investments for a potentially higher return – is completely untested. I will continue to talk about this as the policy continues to be tested, as I am fascinated by what I believe to be a wildly risky maneuver which is likely to be a colossal mistake.
Despite how strange some of our global economic conditions are, we are maintaining our overall stance in the markets. We will be implementing some edits to our international and sector allocations inside of our well-diversified portfolios, which will continue to be designed for our clients’ risk tolerance.
Investing involves risk including the potential loss of principal. No investment strategy, including diversification, can guarantee a profit or protect against loss. Indexes are unmanaged, and cannot be invested in directly. Although the information has been gathered from sources believed to be reliable, it cannot be guaranteed. This presentation may contain forward looking statements and projections. There are no guarantees that these results will be achieved. It is our goal to help investors by identifying changing market conditions; however, investors should be aware that no investment advisor can accurately predict all of the changes that may occur in the economy or the stock market. This information is not intended to be a substitute for specific individualized planning advice. The information presented here should only be relied upon when coordinated with individual professional advice.