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January 2016 Month in Review

Hang on to your bootstraps! 2016 started the year with a bang. The S&P 500 ended the month -5.86%, the Russell 2000 (mid/small cap companies) ended the month -9.88%, and the Barclays Aggregate Bond index ended +1.56%1. As we move into only the second month of the year, we have to decide how the rest of the year pans out with our outlook of single digit growth in equities. The question (as it has always been) remains, “is the oil industry going to stop our economic growth?”

While we continue to get 4th quarter earnings in, we are reminded of how hard this oil supply glut has hit oil companies. Anadarko, Exxon, BP, Chevron…all are posting billions of dollars of loss as the largest companies are not able to shelter themselves from this energy price crash2. Does this mean that each of these companies will go bankrupt? Extremely doubtful. However will they be laying off people and cutting costs to stay financial solvent? Extremely probable. When you have earnings reports with an energy drag of over -75%3, we have a 500lbs gorilla that’s not only in the room, it’s sitting on top of our earnings reports. That’s a weight that we haven’t seen in a long time.

So can oil decelerate our economy? Not on its own. And unlikely even with some partners-in-crime, (think China, Dollar, Political Campaigning, and the Fed). You have to keep in mind what drives our economy. And almost 70% of it is consumption4. While lower prices at the pump get dwarfed by actual QE programs, it does tend to help, rather than hurt our economy. According to the U.S. Energy Information Administration (EIA), retail gasoline prices are down $1.856/gallon since their peak in April of 20145. Also, according to the EIA, the United States consumed approximately 136.78 billion gallons of gasoline in 20146. That means we are saving an annualized amount of $253 billion a year (assuming consumption stayed relatively stable). Again, that’s no QE program ($40 billion/month), but that’s a good $21 billion/month of stimulus to the everyday consumer. Considering our consumer balance sheets are the healthiest they’ve ever been7, that allows for more dollars to go towards spending rather than savings and paying down debt.

The Bureau of Labor Statistics on Friday, Feb 5th said that non-farm payroll increased in January 151,000 and unemployment was little changed at 4.9%8. While the increase was lower than expected, I would say that lower increases ARE expected as we get closer and closer to that elusive, “full-employment” number. The closer we get to full employment, the less increases we should see. So while the market wasn’t expecting that low of a number, truth be told it is still a solid positive number. Add to it that wages and salary increased by 0.6% in December8, and that falls RIGHT in line with our thoughts that the closer we get to full employment, the high wage pressure we will see; and wouldn’t you know it, higher wage pressure would mean more money in consumer’s pockets…see paragraph 3, and footnote 4.

As the dollar stabilizes, and the Fed continues its cautious way down the road of normalizing policy, and China starts actually giving us real numbers to gauge their “new-China” growth, financial markets should stabilize. Does that mean we shouldn’t be managing the risk in portfolios? Of course not. In fact, we have already been making changes in our managed models to take risk off the table and increase our cash position to look for more opportunities.

So hang on to your bootstraps, indeed. These markets will move sharper than we’ve been used to. While we are still very low in expectation for a recession (currently 30% according to our LPL Research team in Boston), we maintain caution into a year that fundamentally should look better than 2015. While I am somewhat tired of writing about oil, I will continue to write about what the market seems to care about. We will continue to manage our portfolios with rational decision-making and the best foresight we can drum up.

To those who need reminder, Valentine’s Day is Sunday.

Best Regards,



1Morningstar Office software
3LPL Research earnings report
4JPMorgan Guide to the Markets, Q1 2016, pg. 16
7JPMorgan Guide to the Markets, Q1 2016, pg. 17

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