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There’s nothing like getting jolted on the first day of the year. Monday, Jan 4th the markets continued December’s lackluster performance on the backs of China fears. The S&P 500 ended the month -2.03% while the more broad-based US Market index, the Russell 3000 returned a - 2.50%1. That puts 2015 at a dismal year for investors, especially those who diversified their risk by investing more globally. The Russell 3000 ended the year - 0.5% while the global markets were rocked by Greece and China. The MSCI World ex US index ended the year -3.19% and the MSCI Emerging Market index ended the year -14.76%1. While this is hard to take in for many investors, this is not an opportunity for investors to walk away from their objectives for growth.
In more positive news, Janet Yellen and the Federal Reserve increased interest rates for the first time since 2006, signaling better strength in the economic landscape especially as it relates to inflation and wage growth. While the Fed balked early in the year due to China’s devaluation of their currency, they held strong to their conviction that the economy is healthy enough to support a small increase in rates. This provides relief to sectors like financials who have been struggling with the squeeze of the interest rates spreads since the Great Recession, and it signals that more economic growth is expected by the Fed in the coming year.
In addition, vehicle sales – a common indicator of consumer spending – had a blowout year and (expected later today, Jan 5th) December numbers look to come in around a very healthy 18MM sales. This is well above the long term average of 15.4MM sales2. Housing starts, another indicator of consumer spending, continues to grow every year from the lows in 2009 – again a signal of strong spending2. And let’s not downplay the fact that Cyber Monday was a HUGE success for online retailers, like Amazon who experienced sales up more than 40% from Cyber Monday the year before3.
As we make our way into earnings season for Q4, we are expecting much of the same as the rest of 2015; energy will be a detractor to overall reports while the ex-energy earnings should show continued positive growth. This should be the last quarter that the energy drag is not priced in to Year-over-Year earnings, and the expectation is that the 1Q earnings season this April will be a better indicator of the overall health of the broad markets.
Big signals of market growth this year we are looking for are the stabilization of the US Dollar and Energy prices. The cyclical nature of supply/demand in the energy sector lends itself to stabilizing and even reversing some of the negative price slump we have experienced over the last 18 months.
On energy, we continue to believe that the pains in the energy sector are directly linked to the price decline we’ve experienced; and that the decline is a function of supply/demand. Furthermore, we believe that inside the supply/demand macroeconomics of price movement, we are confident this is a supply issue and not a demand issue. Consumption continues to increase every year in major consuming countries like the US and China. In fact consumption (demand) is expected to continue to grow through the rest of this year4. On the flip-side, production (supply) – which soared in 2014 and 2015 because of new methods of drilling in the US – has increased over 20% since 20134. This supply glut is what has caused the fast-paced decline in oil prices. As countries like the US, Russia, Iran and Saudi Arabia begin slowing production and tapping into their reserves, production will begin to fall, decreasing the supply output and stabilizing, if not lifting prices. OPEC is already showing small signs of falling production albeit Saudi Arabia is trying their darndest to keep their production up5. As they continue to blow through their reserves the pendulum will swing and prices will begin recovering. The timing is less certain, but the cycle remains true.
We will have our annual market outlook webinar Wednesday, January 27th which will go into much more detail about our views of the landscape for 2016. I would encourage you to participate if possible so you can learn how we are thinking and ask questions if you have them.
Don’t let the first day of the year hold you down. We are continually watching the markets and the economy as they unfold and as it relates to changes in our investment thesis, will manage the risk appropriate to our client’s investment objectives. This is going to be a year of sticking with your strategy, regardless of what emotions overcome you.
As always, please contact us if you have any questions as it relates to your investments or your risk exposure.
1Morningstar Office2JP Morgan Guide to the Markets, pg. 183http://www.nbcnews.com/tech/tech-news/amazon-sales-more-40-cyber-monday-n490446the 4JP Morgan Guide to Markets, pg. 275http://finance.yahoo.com/news/opec-december-oil-output-slips-143648570.html
There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.
The economic forecasts set forth in the article may not develop as predicted and there can be no guarantee that strategies promoted will be successful. Investing involves risk, including the loss of principal.The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All indices are unmanaged and cannot be invested into directly. Unmanaged index returns do not reflect fees, expenses, or sales charges. Index performance is not indicative of the performance of any investment. Past performance is no guarantee of future results.