Posts tagged ‘China Slowdown’

January a Ball After Year-End Fall

disco ball

Investors were cheerfully dancing last month after the stock market posted its best January in 30 years and the best monthly performance since October 2015 (see chart below). More specifically, the S&P 500 index started the year by catapulting +7.9% higher (the best January since 1987), and the Dow Jones Industrial Average climbed 1,672 points to 25,000, or +7.2%. But over the last few months there has been plenty of heartburn and volatility. The December so-called Santa Claus rally did not occur until a large pre-Christmas pullback. From the September record high, stocks temporarily fell about -20% before the recent jolly +15% post-Christmas rebound.

month perf

Source: FactSet via The Wall Street Journal

Although investors have been gleefully boogying on the short-run financial dance floor, there have been plenty of issues causing uncomfortable blisters. At the top of the list is China-U.S. trade. The world is eagerly watching the two largest global economic powerhouses as they continue to delicately dance through trade negotiations. Even though neither country has slipped or fallen since the 90-day trade truce, which began on December 1 in Buenos Aires, the stakes remain high. If an agreement is not reached by March 2, tariffs on imported Chinese goods would increase to 25% from 10% on $200 billion worth of Chinese goods, thereby raising prices for U.S. consumers and potentially leading to further retaliatory responses from Beijing.

When it comes to the subjects of intellectual property protection and forced technology transfers of American companies doing business in China, President Xi Jinping has been uncomfortably stepping on President Donald Trump’s toes. Nothing has been formally finalized, however Chinese officials have signaled they are willing to make some structural reforms relating to these thorny issues and have also expressed a willingness to narrow the trade deficit with our country by purchasing more of our exports. Besides procuring more American energy goods, the Chinese have also committed to buy 5,000,000 tons of our country’s soybeans to feed China’s hungry population of 1.4 billion people.

Reaching a trade settlement is important for both countries, especially in light of the slowing Chinese economy (see chart below) and the dissipating stimulus benefits of the 2018 U.S. tax cuts. Slowing growth in China has implications beyond our borders as witnessed by slowing growth in Europe  as evidenced by protests we have seen in France and the contraction of German manufacturing (the first time in over four years). Failed Brexit talks of the U.K. potentially leaving the European Union could add fuel to the global slowdown fire if an agreement cannot be reached by the March 29th deadline in a couple months.

ret sal

Source: Wind via The Wall Street Journal

While the temporary halt to the longest partial federal government shutdown in history (35 days) has brought some short-term relief to the 800,000 government workers/contractors who did not receive pay, the political standoff over border security may last longer than expected, which may further dampen U.S. economic activity and growth. Whether the hot-button issue of border wall funding is resolved by February 15th will determine if another shutdown is in the cards.

Despite China trade negotiations and the government shutdown deadlock placing a cloud over financial markets, brighter skies have begun to emerge in other areas. First and foremost has been the positive shift in positioning by the Federal Reserve as it relates to monetary policy. Not only has Jay Powell (Fed Chairman) communicated a clear signal of being “patient” on future interest rate target increases, but he has also taken the Fed off of “autopilot” as it relates to shrinking the Fed’s balance sheet – a process that can hinder economic growth. Combined, these shifts in strategy by the Fed have been enthusiastically received by investors, which has been a large contributor to the +15% rebound in stock prices since the December lows. Thanks to this change in stance, the inverted yield curve bogeyman that typically precedes post-World War II recessions has been held at bay as evidenced by the steepening yield curve (see chart below).

treasury spread

Source: Calafia Beach Pundit

Other areas of strength include the recent employment data, which showed 304,000 jobs added in January, the 100th consecutive month of increased employment. Fears of an imminent recession that penetrated psyches in the fourth quarter have abated significantly in January in part because of the notable strength seen in 4th quarter corporate profits, which so far have increased by +12% from last year, according to FactSet. The strength and rebound in overall commodity prices, including oil, seem to indicate any potential looming recession is likely further out in time than emotionally feared.

wall of worry

Source: Calafia Beach Pundit

As the chart above shows, over the last four years, spikes in fear (red line) have represented beneficial buying opportunities of stocks (blue line). The pace of gains in January is just as unsustainable as the pace of fourth-quarter losses were in stock prices. Uncertainties may remain on trade, shutdowns, geopolitics, and other issues but don’t throw away your investing dance shoes quite yet…the ball and music experienced last month could continue for a longer than expected period of time.

investment-questions-border

www.Sidoxia.com

Wade W. Slome, CFA, CFP®

Plan. Invest. Prosper.

This article is an excerpt from a previously released Sidoxia Capital Management complimentary newsletter (February 1, 2018). Subscribe on the right side of the page for the complete text.

DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients hold positions and certain exchange traded funds (ETFs), but at the time of publishing had no direct position in any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC Contact page.

February 1, 2019 at 5:00 pm Leave a comment

Spring Has Sprung: Market Weather Turning

Ox-eye daisies

This article is an excerpt from a previously released Sidoxia Capital Management complimentary newsletter (April 1, 2016). Subscribe on the right side of the page for the complete text.

It was a cold winter for stocks, but as we approached the spring season in March, the flowers have begun to bloom. More specifically, during the month of March, the Dow Jones Industrial index catapulted +7.1% and the S&P 500 index jumped +6.6%. While this roughly +80% annualized rate is unlikely to sustain itself, this flurry of strong performance could be the sign of warmer weather conditions in the economic forecast.

What started out as a cold and blustery January, with stocks posting one of the worst beginning months in history (S&P 500 down -5.1%), quickly thawed out in February and March. Fears over deteriorating economic conditions in the U.S., China along with plummeting oil prices proved fleeting. In fact, as Scott Grannis at Calafia Beach Pundit  pointed out, there is no sign of recession in the U.S. as evidenced by a 43-year low in unemployment claims and a 4.9% unemployment rate (see chart below).

Unemployment Claims 3-16

As I’ve stated for many years, focusing on the never-ending hurricane of pessimistic headlines is a wasteful use of time and destructive force on performance, if acted upon. Offsetting the downpour of negative news stories are the record low interest rates (now incomprehensibly negative in parts of the globe), which serve as a protective umbrella against the short-term stormy volatility. When investors face the soggy reality of earning a near-0% return on their bank savings and a sub-2% Treasury bond market for 10-year maturities, suddenly a 6-7% earnings yield on stocks certainly looks pretty sunny. There have been very few times in history when dividends earned on stocks have exceeded the payments received on a 10 year Treasury bond, but that is exactly the extreme environment we are living in today. No doubt, if the interest rate climate changes, and rates spike higher, stocks will face a more thunderous environment.

However, fortunately for stock market investors (and unfortunately for savers), this week Federal Reserve Chair Janet Yellen reiterated her forceful view of maintaining interest rates at a low, stimulative level for an extended period of time.

If It Bleeds It Leads – At the Expense of Your Portfolio

Even in the face of European terrorist attacks in Brussels and a turbulent (but entertaining) political presidential election season, the four pillars of earnings, interest rates, valuations, and sentiment are still protecting stock investors from an economic flood (see also Don’t Be a Fool, Follow the Stool). Scary news headlines may sell newspapers and attract advertising dollars, but the real money is made by following the four investing pillars.

Also contributing to a clearer outlook this spring is the steadying value of the U.S. dollar and stabilizing trend realized in oil prices.

For most of 2015, multinational corporations saw their profits squeezed due to a 20-25% spike in the dollar. For example, an auto manufacturer selling a car for $20,000 in the U.S. could suddenly see the price of the same car changed to $25,000 in Europe. Meanwhile, a different German competitor could price a similar car manufactured in their country at the lower $20,000. This all translates into diminished sales and profits for American companies. Mercifully, we are beginning to see these currency headwinds abate, and even begin to shift into a slight tailwind (see 5-year chart below).

Source: barchart.com

Source: barchart.com

From copper and corn to silver and soy beans, commodity prices have been in a downward death spiral over the last five years. And crude oil hasn’t escaped the commodity collapse either…until recently. The supply glut, created by factors like the U.S. shale revolution and new added Iranian post-sanction reserves, led to price declines from a 2009 high of $147 per barrel to a 2016 low of $26. With China and U.S. dollar fears abating, oil prices have bounced about +45% from the 2016 lows to about $38 per barrel.

While the weather has been improving on our shores, not everyone appreciates the fact the U.S. has been the “best house in a bad global neighborhood.” As the chart below shows (February 2016), international stock markets have gone into a bear market (down > -20%) since the 2011 and 2014 peaks, while the U.S. has performed about 100% better. Even in the U.S. market, small-midcap stocks (small & midsize companies) fell about -22% from their 2015 peak before recouping much of the losses.

Source: Financial Times

Source: Financial Times

Whether large companies, as measured by the S&P 500 index, which fell about -15% from the peak, suffer a true, technical -20% “bear market” or continue the current seven-year bull market is debatable. Regardless, what we do know is investors survived another cold winter and spring has produced a weather forecast that is currently predicting warmer weather and sunnier economic skies.

investment-questions-border

www.Sidoxia.com

Wade W. Slome, CFA, CFP®

Plan. Invest. Prosper. 

DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients hold positions in certain exchange traded funds (ETFs), but at the time of publishing had no direct position in any security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC Contact page.

April 3, 2016 at 11:59 pm Leave a comment

Groundhog Day All Over Again

Groundhog

This article is an excerpt from a previously released Sidoxia Capital Management complimentary newsletter (February 1, 2016). Subscribe on the right side of the page for the complete text.

It’s that time of the year when the masses gather in eager anticipation of Groundhog Day to predict whether the furry rodent will see its shadow in 2016, thereby extending winter for an additional six weeks.

In the classic movie Groundhog Day, actor Bill Murray plays character Phil Connors, an arrogant, self-centered TV weatherman who, during an assignment covering the annual Groundhog Day event in Punxsutawney, Pennsylvania, finds himself stuck in a time loop, repeating the same day over and over. With a feeling of nothing to lose, Phil repeatedly decides to indulge in reckless hedonism and criminal behavior. After being resigned to perpetually reliving the same day forever, Phil begins to re-examine his life and falls in love with his co-worker Rita Hanson (see scene here). Ultimately, Phil’s pure focus on the important priorities of life allows himself to break the painful monotonous time loop and win Rita’s love.

Stock market investors are lining up in a similar fashion to predict whether the financial winter experienced in January will persist through the rest of the year. The groundhog, equipped with a thick fur coat, certainly would have been more optimally prepared for the icy January financial market conditions. More specifically, the S&P 500 index declined -5.1% for the month and the Dow Jones fell -5.5%.

Unfortunately for many investors, they too have been trapped in a never-ending news cycle, which painfully buries the public with a monotonous loop of daily pessimistic headlines. As a result of the eternally distorted media cycle, many investors have lost sight of important priorities like Phil Connors. Since the beginning of 2011, the investors who have endured the relentless wave of media gloom have been handsomely rewarded. From 2011-2016, the S&P 500 stock index has ascended approximately 54%, even after accounting for the significant January 2016 decline.

Unless you were burrowed in a hole like a groundhog, you will probably recognize a number of these ominous headlines spanning across the 2011 – 2015 headlines:

  • 2011: Debt Downgrade/Debt Ceiling Debate/European PIIGS Crisis (-22% correction)
  • 2012: Arab Spring/Greek “Gr-Exit” Fears (-11% correction)
  • 2013: Fed Taper Tantrum (-8% correction)
  • 2014: Ebola Outbreak (-10% correction)
  • 2015: China Slowdown Fears (-13% correction)

Similar to the Groundhog Day movie, the headlines of 2016 match the tone and mood we’ve seen in recent years. Here’s an abbreviated list of the recurring worries-du-jour in January:

China Slowdown: Is this something new? As you can see from the chart below, China has been slowing since 2010. Due to the law of large numbers, and as the second largest economy on the globe, it is natural to see such an enormous economic engine eventually slow. Rather than panic over China’s slowing, observers should be applauding. China’s Q4 GDP growth recently came in at +6.8%, almost 10x the level recorded by the U.S. in Q4 (+0.7%). Even if you mistrust the official Chinese government’s reported data, our economy would kill for the still impressive independently reported growth statistics (see chart below). While the concerted effort of the political regime to migrate the country from an export-driven economy to a consumption-based one has caused some growing pains, nevertheless in recent months we have seen China report record automobile purchases, retail sales, oil consumption, and industrial production.

China GDP 2-1-16

Rise of the U.S. Dollar: This is a legitimate concern that has had tangible negative impacts on the U.S. economy. As you can see from the chart below (blue line), in less than one year, the value of the U.S. dollar spiked by approximately +25%. If you are a multinational company exporting a product to Europe for $100, and consumers wake up a year later having to pay $125 for the same product, it should come as no surprise to anyone that this phenomenon is squeezing profits. The good news is that U.S. corporations have already absorbed the worst of this currency pain dating back to early 2015, so if the stabilizing foreign exchange trends remain near current levels, as they have over the last year, there should be no additional economic drag.

U.S. Dollar 2-1-16

Oil Prices Down: Somehow the U.S. media is trying to convince the public that lower oil prices are bad for the economy. Yes, it is true, the financial restructurings and lost jobs associated with oil price declines will hurt the economy and the banks overall. However, the benefits of lower oil prices on the broader economy (i.e., more money in consumers’ pockets) is unambiguously positive and will overwhelm any indirect damage. Every penny decrease in gasoline prices (now roughly $1.83 per gallon nationally) equates to about a $1 billion tax cut for consumers (see chart below). Many people are worried about oil prices being a signal of weakness, but if you look at the last few recessions, they were all preceded by an oil price spike, not a price collapse.

Source: AAA

Source: AAA

Federal Reserve Monetary Policy: The first interest rate hike in nine years took place in 2015, but that did not prevent investors from fretting about the timing of the next interest rate hike. As I’ve written many times (see Fed Fatigue Setting In), the Fed has barely budged its target rate to 0.375%, so this is much to do about nothing. Wake me up when we get to 2.00%, at which point we will still be far below the long-term average but at a more meaningful level (see chart below).

Source: The Wall Street Journal

Source: The Wall Street Journal

Presidential Elections: Congress’s approval rating is abysmal, but like it or not, primary season is just starting and we are stuck in a presidential election cycle until the second Tuesday of November. Guess what? If you want to know the impact of the elections on the financial markets, then I will give you the short answer…it just does not matter who gets elected. History shows us that the markets go up and down under both Republican and Democratic parties. If you are comparing the track record on the political parties’ track record on debt creation, it is a mixed bag as well (see chart below). Arguably, in half the cases, the nomination of the Federal Reserve chairs will have as large (or larger) an impact than the elected president. If you were to factor in the inevitable splits in Congress to the equation, the result is gridlock.  I have contended for some time that gridlock is a positive outcome because it structurally forces a lid on disciplined government spending (see Who Said Gridlock is Bad?). If this isn’t a good enough explanation, see Barry Ritholtz’s take on the subject of politics and the stock market…I couldn’t sum it up any better (click here)

Source: Calafia Beach Pundit

Source: Calafia Beach Pundit

Fortunately for groundhogs, and long-term investors, dealing with challenging and volatile climates is nothing new. Both burrowing marmots and emotional investors need to adapt to ever-changing environments…sunny or overcast. In addition to a cold 2016 start, January was also a chilly month in 2014 and 2015, with the S&P 500 down -3.6% and -3.1%, respectively. Despite this seasonal sour sentiment, there is a silver lining. In both instances (2014 & 2015), the market rebounded significantly in subsequent months after the slow start at the beginning of the year. For the remainder of the year, the S&P advanced +15.5% in 2014, and +2.5% in 2015.

In Groundhog Day the movie, Bill Murray relived the same day over and over again, and repeated the same missteps until he learned from his mistakes. Long-term investors will be served best by applying this same philosophy to their investments. Like a groundhog, investors have a tendency to become scared of their own shadows. It’s easy to succumb to the infinite time loop of worrisome headlines, but rather than burrowing away in hibernation, creating a diversified, low-cost, tax-efficient portfolio customized for your specific time horizon, risk tolerance, and liquidity needs is a better way of celebrating this year’s Groundhog Day.

investment-questions-border

www.Sidoxia.com

Wade W. Slome, CFA, CFP®

Plan. Invest. Prosper. 

DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients hold positions in certain exchange traded funds (ETFs), but at the time of publishing had no direct position in any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC Contact page.

February 1, 2016 at 12:12 pm Leave a comment


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