February 16, 2016

February 16th, 2016

The Market

Liz Ann Sonders, Charles Schwab & Co.’s Senior Vice President and Chief Investment Strategist (i.e., the “big cheese” for giving investment and economic analysis) in a recent interview dispelled the doom and gloom mentality that we constantly hear from the news media.

Her key points and my comments in italics:

  • Recent U.S. employment data has renewed the possibility of further Federal Reserve short-term interest rate increases (not decreases as the media would have you believe).
  • The stock market appears reasonably valued, and higher valuations are unlikely without a return to positive earnings growth.
  • Some market participants have said low oil prices are sending a recessionary signal, but  recessions historically have been preceded by oil price spikes, not crashes (as the media would have you believe).

Are we headed into a recession?

Based on recent economic data, we don’t believe either the global or U.S. economies will fall into recession, although the risks have increased.

In the U.S., we continue to see economic growth thanks to a healthy labor market, housing investment, more government spending and a strong services sector. While there are meaningful pockets of weakness in the real economy (for example, manufacturing) and market-based indicators (such as yield spreads, the shape of the yield curve and stock prices) are currently painting a dour picture, the bulk of the leading economic indicators are not at danger levels at the present time.

Globally, we see continued growth in Europe (for example, purchasing manager index levels are consistent with expanding economies, eurozone leading economic indicators on the rise) and  a modest deceleration in China, while other indicators are at levels associated with a low probability of global recession. Source: Charles Schwab & Co.

The Markets Last Week

Stocks slipped some 1% last week, but managed to rally from lows, thanks to a late-week rebound in oil prices and Friday’s comments from a Federal Reserve official that bolstered poorly performing bank stocks.

Financials were the second-worst-performing sector for the week, down 2.4%, but did the best Friday, up 4%. Wednesday Fed Chair Janet Yellen played down talk of negative interest rates as only a remote possibility. But investor chatter about it roiled markets, and New York Fed President William Dudley Friday said the debate about negative rates is “extremely premature…The U.S. economy is in quite good shape.”

Investors are antsy over the possibility of a negative-interest-rate policy, something employed in Europe and Japan to encourage growth. But such a program could hurt profits at banks, which would have to pay for reserves they keep at the Fed. A minor recovery in oil prices Friday helped improve investor sentiment, if only for a day. Crude rose 12% Friday to $29.44 per barrel, but was down 5% on the week.

The Dow Jones Industrial Average lost 231 points, or 1.4%, to 15973.84 last week, while the Standard & Poor’s 500 index dropped 15 to 1864.78. On Thursday, both indexes closed at levels not seen since 2014. The Nasdaq fell 0.6%, to 4337.51, for the week.

Thursday, crude received a boost after the United Arab Emirates energy minister said OPEC was ready to cooperate on production cuts, says Jason Ware, chief investment officer at Albion Financial Group. Though low oil prices are good for the global economy, the stock market continues to follow the oil market slavishly, he says.

What’s happening in the real economy isn’t as bad as traders’ screens would have it, he adds, pointing to U.S. January retail sales and weekly jobless claims data out last week that were above consensus.

Brad McMillan, chief investment officer at Commonwealth Financial Network, concurs. The market is slowly coming to terms with the removal of the Fed security blanket—its extraordinary easing policy. “The negative first-quarter earnings seasons is mostly behind us, and it’s gradually sinking in that this isn’t as bad as 2008,” he adds.

Still, the heretofore nonstop fretting in 2016 about Chinese economic growth magically disappeared last week. It might be because Chinese markets were closed last week for the Asian New Year, notes Louie Nguyen, chief investment officer at Soledad Investment Management. “It’s as if the play was missing its main actor,” he says.

When China returns from the wings this week, there could be some volatility if growth slowdown fears return, Nguyen adds. Moreover, on Monday, U.S. markets are closed for Presidents’ Day, and it might not be so relaxing for traders when Chinese markets reopen Sunday evening, U.S. time. (Source: Barron’s Online).

The Numbers

Returns through 2-12-2016 1-week Y-T-D 1-Year 3-Years 5-Years 10-Years
Bonds- BarCap  Aggregate Index      .2    1.8    1.4     2.3     3.8     4.7
US Stocks-Standard & Poor’s 500   – .7 -8.5   -8.8     9.4     9.3     6.2
Foreign Stocks- MS EAFE Developed Countries -4.7 -12.9 -16.0    -1.3     0.0     1.2

Source: Morningstar Workstation. Past performance is no guarantee of future results.  Indices are unmanaged and cannot be invested into directly.  Three, five and ten year returns are annualized excluding dividends.

Motivational Quote of the Week

“Do what you can, where you are, with what you have.” – Teddy Roosevelt

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