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With the markets fluctuating the way they have been, I wanted to update you on a piece I wrote in our Fall 2015 newsletter that we titled ‘A time to play defense’.
We mentioned in the Fall 2015 newsletter:
There has been a noticeable “character” change since late spring/summer. Concerns over China (its markets, its economy, its currency and debt), oil and the Fed talk of raising rates surfaced in August and are still a “force” today.
US Markets have been trending lower since August – except for one big rally in October. A “Buy and Hold” strategy will probably not work here. We believe more active management is key, and we will certainly be selling into rallies although those are rare so far in 2016. It seems the market goes from ‘oversold’ to more oversold.
The Markets continue to close at lower highs as the “bears” are in control, and while they say “a trend is your friend,” you need to respect the trend. We will not be aggressive with stocks until we start seeing higher highs in the S&P, which would take some time to develop.
In addition, the timing of this sell-off has really thrown investors. New Year’s is a period of optimism, new starts and possibilities, but right now, there is a high level of pessimism and concern that is completely understandable. If this sell-off was in October, investors might not be as skittish as market corrections tend to happen during that season.
On the bright side, there are other asset classes to consider as we ride out this stormy market. We continue to like Muni ETFs, which pay investors tax-free interest on federal and state levels. Also, the concern of municipal defaults, as others predicted a few years back, have diminished.
We need to remind ourselves about how the market operates. The old analogy “the market takes an escalator up and the elevator down” is what we are now witnessing. Meaning the market moves up a little at a time and when it comes down, it descends several floors at a time (like an elevator) sometimes erasing months, if not years of the escalator ride up.
After a volatile week, markets regained some steam, helped by a recovery in oil prices and some upbeat earnings reports. For the week, the S&P 500 gained 1.41%, the Dow grew 0.66%, and the NASDAQ added 2.29%.1
Though the headwinds that roiled markets since the beginning of the year remain, investors found their footing last week and closed out a positive week for the first time in 2016.
What caused the uptick in investor sentiment last week?
Oil prices rebounded to settle at their highest close since the first week of January. While oil is likely to remain volatile, a rally helped investors settle their nerves.2 Markets also got some help from the European Central Bank, which hinted at further stimulus measures to boost the European economy.3
We’re also in the early stages of U.S. earnings season, which is stealing attention away from China and oil prices. So far, with 73 members of the S&P 500 reporting in, earnings are already up 1.4% on 0.8% higher revenues. While those aren’t stellar results, 71.2% of reporting firms beat earnings estimates, suggesting that corporate leaders set expectations low enough to be able to beat them amid challenging conditions.4
However, the overall fourth-quarter earnings picture is likely to be less rosy. U.S. companies are struggling to achieve growth goals in a shaky global business environment, and analysts expect overall Q4 earnings to come in below Q4 2014 levels.5 What do these challenges spell for investors? Volatility. While we can’t predict the future, we think that the first few months of 2016 are likely to be rocky for equities.
Looking ahead, the Federal Reserve’s January meeting will take center stage this week, though economists expect them to hold pat on interest rates.6 Though it’s possible that Fed economists may vote to raise rates further, a raft of weak data and ongoing concerns about global growth are likely to trigger a wait-and-see approach. The Fed is seen as data dependent, and in our view; market dependent as well.
The first look at Q4 economic growth will be released on Friday, and it’s likely to show weak growth in the last three months of the year. Earnings season will also continue, and investors will be looking forward to reports from heavy-hitters this week like Apple [AAPL], Facebook [FB], and Ford [F].7
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