Happy New Year!
It’s still January, so I think I can still say that. Anyway, what a start to the year this has been. Last week I did a couple of live online market updates. We tried out some new technology that I think worked pretty well. The live event was streamed though our YouTube channel, so unlike Goto Webinar, you don’t have to download any software. This is certainly something we intend to do more of throughout the year, especially at times of increased market volatility. For future events we will always send out an email notice, as well as post an announcement on the Lethemon Financial Facebook page. If you are on Facebook, make sure that you have “liked” our page to be sure to get updates. As far as the event we did last week, unfortunately we can not provide a recording of the broadcast at this time, so I thought I would give you a quick recap of some of the things I discussed on the call
2015 Market Recap
Being in the right sectors matter. 2015 S&P 500 returns by sector shown from best to worst1:
2015 was not a bad year for the market, but it wasn’t a great year either. The S&P 500 ended finishing up 1.38% and the Dow Jones Industrial Average finished up just .23%. However when you look at some of the individual sectors and categories you will notice that many areas did quite bad last year.
As you can tell being in the right sectors matters. Avoiding the wrong sectors is just as important as choosing the right ones. Our sector rotation model currently has Healthcare, Biotechnology, Internet, Consumer staples and Consumer discretionary. And it had those 5 sectors throughout all of 2015.
First 5 Trading Days of the Year
The first 5 trading days for the month of January were the worst ever recorded for the S&P 500. We were down a little over 5%. There’s kind of a wall street saying that how the first 5 days of year go that’s how the month of January will go. And how January goes that’s how the rest of the year goes. In fact the Stock traders almanac has an entire page exactly for this. Titled January’s first 5 days an early warning system. Prior to this year, the worst January on record was in 2008, when the S&P 500 ended up losing 38.5%. So this is something that has certainly has garnered some attention. However when you look at the data, out of the 10 worst first 5 days returns, the market ended up finishing positive for the year in 5 of those years. And, when you look at the 20 worst first 5 days returns 11 out of 20 of those years the market ended positive for the year. In fact in a few of those years the market actually posted some pretty impressive returns. Like 1991 which is now the 4th worst, down 4.6% in the first 5 days, the market ended up finishing up 26.3% for the year. So this is certainly not a death sentence for the market.
Outlook for 2016
When you look at the headlines or turn on the business channel there are certainly a lot of things that we can say are negative about the market. But remember that’s what the media wants. Their job is to sensationalize the events of the markets and the economy as much as possible so that you will tune in to their shows or read their papers. When things are good people tend to put this stuff on the back burner and don’t really pay a lot of attention. However, its when things get crazy when people really start to take notice. What we want to make sure is that we are making smart rational decisions when it comes to our money and investments. We want to avoid getting caught up in the hype.
There is actually a lot of good things happening in the economy right now. We do not believe that we are heading for a recession or another major stock market crash.
The decline in oil is front and center as one of the primary focal points of this current downturn that we are experiencing. The drop in oil has led to a loss of earnings in the S&P 500 as a whole. However, I believe that there is a positive side effect of low oil prices. Lower oil means lower energy costs for most major companies. Any company that uses energy as part of their manufacturing process or ships a product will benefit directly from lower energy prices. Locally in Michigan, low gas prices mean that auto manufacturers can produce and sell more profitable larger cars and SUV’s.
Also, as we talked about in my 4th quarter market update call, the United States is on the verge of becoming energy independent. We now have 3 places here in the US that are producing over a million barrels of oil per day. Keep in mind there are only 9 places on the planet where this is true. This is a news story that is going largely unnoticed.
The Fed and Raising Interest Rates
After a lot of thought and debate the Federal Reserve decided to raise interest rates last December. This is the first rate hike since before the financial meltdown in 2008. Although this is viewed as negative by some, indicating an end to easy money and the stock markets “bull” run, history tells us that since 1970 expansions have lasted for about 47 months after the first interest rate hike.2
China is the worlds second largest economy and there are fears that its growth is slowing. In fact it has actually been slowing for about 5 years now. This recent Chinese stock market decline has fears that the slowdown in China will spill over and affect the growth of the US economy. The United States exports about $100 Billion dollars worth of goods and services to China every year, which is about 0.7% of our GDP.3 I don’t think that a slowdown in China will have any dramatic effect on the US economy.
What do the Technical Indicators Say?
As most of you know, our firm uses a lot of technical analysis in our research and building portfolios. So, no matter how strong or weak the fundamental indicators look, we always want to come back and look at the technical analysis.
Technical analysis is really the study of the stock charts themselves. Its really a very simple measurement of supply and demand. Implied in every single chart is all of those fundamental indicators I listed above. Peoples fears and opinions expressed with what they are actually doing with their money. Not just what they are saying, but what they actually do. If more people want to buy than sell, prices go up, if more people want to sell than buy, prices go down.
When we look at the market today, there are 3 things that I am watching for. Currently all 3 of these remain positive, but if one or more turns negative, we may take action to reduce the exposure to stocks.
- The support level for the S&P 500 holding above 1870. We have seen the S&P 500 dip down to this level 4 times in the past year and a half. October 2014, August 2015, September 2015 and January 2016. A dip below 1870 might mean a more significant drop is in store for us.
- Relative strength S&P vs Aggregate bond index. This is an interesting relative strength chart that shows whether stocks or bonds are in a position of positive relative strength. Currently stocks are in favor.
- Our Dynamic Asset Level Investing (DALI) Indicators. Using Dorsey Wright Research, each of the 6 Broad asset classes are ranked on a relative strength basis against each other. This is the primary driver for building our asset allocation. As ranked by DALI, US stocks are still in the number one spot.
Current DALI Rankings as of January 15th 2016
- US Stocks
- Fixed Income
- International Stocks
This ended up being much longer than I intended when I first sat down to write it. I guess that just means there is a lot going on. If you have any specific questions not addressed here, please do not hesitate to call.
Market downturns are never fun as we are living through them, however it is a part of investing that we just can’t avoid. Being disciplined and sticking to a long term strategy is usually best. I look forward to talking to you soon.
1S&P 500 Individual Sector Returns for Calendar year 2015
2Haver, LPL Research, July 17th, 2015
3Wesbury 101, January 15th 2016, Brian Wesbury, Chief Economics First Trust Portfolios
Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. The Standard & Poor’s 500 Index is a capitalization weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries. The Dow Jones Industrial Average is comprised of 30 stocks that are major factors in their industries and widely held by individuals and institutional investors. Because of their narrow focus, sector investing will be subject to greater volatility than investing more broadly across many sectors and companies.