Advisor Insights Market News Weekly Market Commentary

Market Commentary for February 23, 2016

market commentary

Oil hopes, oil prices, oil talk… the single largest market mover this past week was oil.

Written by: Benjamin Bimson CIMA® / BCJ Financial Group

It even trumped the Fed minutes that were released last Wednesday. The tone of the Fed minutes was expected to be a bit dovish (appeasing to the easy-money, low-interest rate crowd) and it didn’t disappoint.

Plenty of concern over the markets and global financials kept there from being any big surprises to the market. It seems that the market just wants to have stable oil prices so bad! Not sure that is going to happen any time soon.

In mid-November when crude was trading roughly 37% higher than it was this past Friday, Tim Gordon, a technical analyst, predicted that oil would get as low as $26 and CNBC, as well as other news media outlets, published this prediction, which many thought was ridiculous.

Well, folks, we touched $26. I like this guy, because he is cautious. He gave an interview in which he described the fact that he would want to see a rise to $38 to make him confident (and before he will be willing to pat himself on the back) that the low was actually in and we can safely move on. Guess this oil game is going to drive a bit further. As of Friday, oil was still about 27% lower than that target number.

Last week, economic numbers were slightly encouraging that the economy has not yet fallen off a cliff based on the numbers. Inflation was slightly up, unemployment numbers were down again and leading economic indicators still show growth.

These all indicate that the US is not in a recession at this time despite the growing caucus of recession declarations (none of which can be empirically proven yet). However, one thing few are talking about is that with all of this positive news we still are having huge trade deficits especially with China and Japan.

Ned Davis of the Ned Davis Research Group posed a good question this week. He asked how much China plays into our good deficit. The answer: 49.7%! It is staggering. With oil down so much over the last year and a half, intuition would cause someone to think that deficits should be falling.

The following chart shows trade deficits for 2015. Oil is indeed shrinking throughout the year but other real goods more than take up the slack! This is more proof that dollar appreciation and global economies are having an impact on us here in the US.

Chart Source: The Other Deficit Problem – Plus Employment Trends and Industrial Production Updates. Ned Davis. Ned Davis Research Group. Feb 19, 2016 [2/19/16]

Chart Source: The Other Deficit Problem – Plus Employment Trends and Industrial Production Updates. Ned Davis. Ned Davis Research Group. Feb 19, 2016 [2/19/16]

These kind of trade imbalances are not good for US GDP growth as they put pressure on us and make U.S. goods more expensive, relative to foreign goods, which affect manufacturing here in the U.S. and corporate earnings on a lagging basis.

Here is a chart that shows the exports of the U.S. which indicates how the declining exports from the US are continuing their downward trend which is a leading indicator for future domestic manufacturing to slip lower still.

Chart Source: The Other Deficit Problem – Plus Employment Trends and Industrial Production Updates. Ned Davis. Ned Davis Research Group. Feb 19, 2016 [2/19/16]

Chart Source: The Other Deficit Problem – Plus Employment Trends and Industrial Production Updates. Ned Davis. Ned Davis Research Group. Feb 19, 2016 [2/19/16]

These are indeed concerning. I do think I would stop short of Trump’s call for tariffs on imported goods to make domestic goods more competitive for lots of reasons. It could be done other ways without starting a trade war.

What about giving tax incentives to domestic manufacturers? Might even help with wage growth here in the US. There is a lot that politics could and should do. Getting it done is probably the big issue though.

We still stay firmly in the camp of being careful not to call a recession before data is there to support it. There are some sparks of hopeful indicators, but so far, they have simply inspired some hope that it might be stable.

Growth is extremely slow and the Fed really wants to raise rates, but is indicating it may be cautious. The likeliness of four rate hikes this year is certainly looking unlikely.

It would be great if the bottom proves to have been put in, but the rally has not yet given full proof that all is well in the marketplace. Significant risks remain and very well may prove to be simply a dead-cat bounce (we were extremely oversold).

Slow growth is growth, but with many questions and some disturbing global issues, putting a finger on the “one big issue” is the illusive thing. It is possible for the foreign markets to go into recession without dragging the US, but the US is far from robustly healthy.

For now, it looks like it is ok, but probably not going to be a huge gainer. We remain cautious and watchful. We will keep digging and looking at the facts and are prepared to do whatever is necessary to get our clients, where they want and need to go.

 

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