2015 was a strange investment year…
Written by: Benjamin Bimson CIMA® / BCJ Financial Group
2016, though only one week old, is proving that strange is just what we are dealing with (ok, the opening week of 2016 was among the worst % loss weeks on record). So far the market has been dominated by China stock selloff and all the fears associated with that, oil prices dropping 10% in the first week of 2016 trading and slowing ISM (manufacturing data). The bright side has been a continued improvement in the jobs reports in the US.
So far, it has been good to see that there has not been an unanticipated “run for the exit” in equity investing despite sharp declines. How long the fortitude lasts… we will see. All last fall, we advocated to our clients to avoid big bets and therefore remained cautious, which has been extremely helpful to limit the downside exposure. We are watching a few things to see if positive or negative trajectory prevails.
One of the big reasons China has been so dominant in determining the market direction so far this year, is that they have been the world’s dominant raw material demand source this past expansion phase. If China is struggling, we have further pressure on manufacturing, which has corporate profit implications that are not good. The corporate profits slowed last year and we haven’t seen any improvement yet. The following chart shows profits and manufacturing and how they are related.
The reason this has been so key and will be key to successful market growth in 2016 is that there is a perception that central banks have lost some effectiveness. This is not something that is really a huge surprise since Ben Bernanke himself mentioned in 2010 that the biggest risk to market activism by central banks was their effectiveness over time. Namely, that the longer it went on, the less effective it could be. Well, I don’t know if he ever envisioned it lasting as long as it did.
Mohammed El-Erian, former CEO of PIMCO talked about this at the Global Indexing and ETF conference that was in Scottsdale, AZ last month. He also said, “The key thing is not to get paralyzed.” We need to recognize that volatility, although painful at times, is a likely outcome of this. Well, we certainly have seen that…
Oil has been another big issue. With oil prices dropping it is sometimes hard to tell if it is due to the stock markets going down or stock markets going down because oil prices go down. When commodities get securitized, it can get jumbled. No doubt, the ongoing unhinging of oil prices has been a major headline risk. It certainly looks like it does not have a bottom in its’ price yet based on the interest in futures contracts that have put option prices around $25/barrel (a put option is the right of the owner to sell oil at $25 which is lower than oil prices have been by nearly $7-$8).
Lastly, we have the interesting prospect of this being a major presidential election year and the Fed being in rate rising mode. It is way too early to really say if the Fed will raise the rates as many times as they indicated they planned to at last meeting, but jobs is one thing that indicates they might. As we get closer to March (the most likely potential next rate hike), it will get less murky.
We continue to monitor the possibility of a recession, but there just currently isn’t any evidence that we are in or about to start a recession. We look at these things daily. We continue to advocate not making big bets because we simply don’t have a crystal ball. Things are choppy and volatile but we don’t see evidence that the sky is falling. Last October is a good reminder that things can change direction very fast and we need to be prepared to limit potential for loss but not get rid of every opportunity to obtain gains when they are available.
BCJ FG 16-5
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