Despite sinking 2.2% last week, the Standard & Poor’s 500 has yet to drop the necessary 20% for designation of a “Bear Market”. Still, the popular benchmark is more than halfway there, and as much as we hate to admit it, we should at least consider the possibility that this is the start of something more than your run-of-the-mill correction (a “correction is defined as a drop of more than 10% – but less than 20% from recent highs). But it is important to understand Bear Markets that occur during times of NO RECESSION tend to be shallower and recover more quickly. And, it is extremely important to understand that unlike 2008, the U.S. economy has a very good chance of AVOIDING a recession in 2016. For more information about Bear Markets, click here.
RECOMMENDED ACTION: make sure any portfolio withdrawals anticipated during the upcoming 18 months (from your portfolio) are in more stable short term bonds or money funds. If you are aware (and we are not) of an upcoming withdrawal for a new car, home renovations, second home purchase, etc., please notify us ASAP to make sure the anticipated withdrawal is not invested in stocks or stock mutual funds.
Most of the time, the U.S. stock market looks to 3 factors (call them the “pillars” which support the stock market) to support its upward trend – let’s grade each of the pillars.
CONSUMER SPENDING: This grade equals B+ (very favorable). Gasoline prices continue to drop. These trends put more money in the pockets of Americans in 2016.
THE FED AND ITS POLICIES: This factor is rated B (favorable). The U.S. economy can handle higher rates as long as the pace of future interest rate increases is slow. Fed Chair Janet Yellen made clear in her press conference after the December meeting that the path higher would be “gradual”.
The Fed’s plan to gradually raise rates in the coming years won’t derail the economy and brings some certainty to the market, says Morningstar’s Bob Johnson. The market consensus on the 2016 pace of increase is somewhere around two to possibly three rate increase of .25% each.
BUSINESS PROFITABILITY: This factor’s grade is a C (average). During the next 4 weeks, investors will turn their attention to the fourth-quarter earnings season.
OTHER CONCERNS: The “Heat Map” is indicating the U.S. stock market is in OK shape ASSUMING no international crisis. On a scale of 1 to 10 with 10 being the highest level of crisis, we rate these international risks collectively as a 7 due to Saudi Arabia severing diplomatic ties with Iran and the potential for social/political upheaval in China. These risks deserve our ongoing attention.
The purpose of the section is to share valuable information about positive actions or information to empower ourselves. Advisors and/or staff of Valley National select a topic they would like to share with you which you can choose to use. This week, David Givler, one of Valley National’s first-year professionals, and Laurie Siebert CPA, CFP, AEP®, Senior Vice-President of Valley National have chosen to share important information about:
“File your income tax return EARLY to beat the criminals to the punch”
Do you always feel like putting off your tax return to the last possible minute? Here’s some information that might change your mind.
Let’s first start with the positive: According to a recent article from “Kiplinger”, the IRS was able to stop 4.1 million fraudulent returns, totaling about $25 billion in 2013. Great news for those filing their tax returns in the upcoming months, but what about the ones who weren’t caught? In the same year, the IRS failed to catch criminals from filing an astounding 1 million fake returns totaling $5.8 billion. Not only did these criminals fill their pockets with phony refunds, but the process was extremely time consuming for the victims. The honest tax payer filing their return ended up waiting, on average, 278 days to get their correct refund. In order to beat the criminals to the punch you can file your return as early as possible and in turn get your refund back before the bad guy makes their move. Best practice: Contact your tax preparer, boot up your software program or do whatever you can to try to get that return in before you are stuck waiting almost 9 months to get your rightful refund.
Last week, U.S. Stocks and Foreign Stocks both decreased. Bonds increased. During the last 12 months, BONDS outperformed STOCKS.
Returns through 1-15-2016
1-week
Y-T-D
1-Year
3-Years
5-Years
10-Years
Bonds- BarCap Aggregate Index
.3
1.0
-.1
1.8
3.4
4.6
US Stocks-Standard & Poor’s 500
-2.2
-7.9
-3.6
10.8
10.1
6.1
Foreign Stocks- MS EAFE Developed Countries
-2.8
-8.8
-8.0
.7
1.3
1.6
Source: Morningstar Workstation. Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly. Three, five and ten year returns are annualized excluding dividends.
The show airs on WDIY Wednesday evenings, from 6-7 p.m. The show is hosted by Valley National’s Laurie Siebert CPA, CFP®, AEP®. This week Laurie and guest host Daniel Banks or Silver Crest Insurance will discuss: “The Medicare Annual Disenrollment Period and other Medicare related items”
Laurie and Daniel will take your calls on these topics and other inquiries this week. Questions may be submitted early through www.yourfinancialchoices.com by clicking Contact Laurie. This show will be broadcast at the regular time. WDIY is broadcast on FM 88.1 for reception in most of the Lehigh Valley; and, it is broadcast on FM 93.9 in the Easton and Phillipsburg area– or listen to it online from anywhere on the internet. For more information, including how to listen to the show online, check the show’s website www.yourfinancialchoices.com and visit www.wdiy.org.
Despite sinking 2.2% last week, the Standard & Poor’s 500 has yet to drop the necessary 20% for designation of a “Bear Market”. Still, the popular benchmark is more than halfway there, and as much as we hate to admit it, we should at least consider the possibility that this is the start of something more than your run-of-the-mill correction.
When you’re stalked by a bear in the woods, it’s probably not wise to pause and ponder whether it’s, say, a black bear or a grizzly. Not so when the S&P 500 starts falling. At that point, it’s important to ask, “What kind of bear market are we in”?
It isn’t an academic question. Most bear markets occur in tandem with a recession. That was the case with the bear market that started in October 2007 and saw the S&P 500 tumble nearly 60%. It was also the case during the dot-com bust, when stocks lost about half of their value. Of the 15 bear markets that have occurred since 1928, 10 fit this pattern. These bear markets tend to be long—a median of just over 20 months—and deep—the S&P 500 has dropped 44% on average.
If one looks only at the headlines, it’s easy to imagine the worst. China’s stock market is in free fall, pushed lower by investors who fear the total collapse of the world’s second-largest economy. The junk-bond market, meanwhile, appears to be signaling a 20% chance of recession, even if you strip out the beleaguered energy sector. Manufacturing in the U.S. is slowing, and in what was a decent start to earnings season, Michael Ward, CEO of railroad operator CSX (ticker: CSX), mused that his company is feeling pressures it has never felt outside a recession. If this isn’t just another growth scare, then the road ahead will no doubt be a painful one.
Yet despite the chaos at home and abroad, there is a very good chance that the U.S. will avoid a recession in 2016. The economy is still cranking out close to 200,000 jobs a month, and labor growth shows little sign of slowing, says RBC Capital Markets economist Tom Porcelli. He notes that the Labor Department’s Job Openings and Labor Turnover Survey showed there are 2.5 times as many job openings as people collecting unemployment insurance. And while all of the manufacturing surveys point to continued weakness, manufacturing makes up just 12% of the U.S. economy. The services sector makes up 86%, and the nonmanufacturing sectors appear to be holding up just fine. In the past, the strength in the services sector helped the U.S. weather weakness in manufacturing, as was the case during the emerging market crisis of 1998-99. “There are issues to be sure,” Porcelli says. “But the U.S. economic backdrop is relatively sound.”
But if it isn’t a recession, why is the market freaking out? Chris Verrone, head of technical analysis at Strategas Research Partners, argues that the market is starting to price in some sort of financial crisis that will most likely occur in the energy and commodity sectors, where bond prices have fallen and the cost of credit-default swaps—which pay out if a company can’t pay its debt—have spiked. The collapse of China’s currency is also a fear, as the markets fret that it will reverberate through the developing world, and ultimately take down the global economy. At this stage, it doesn’t matter whether the fears are overblown. Market participants believe them, and that could cause a bear market even if they never materialize.
NONRECESSIONARY BEAR MARKETS tend to be shallower and recover more quickly. The most famous case was the 34% drop in the S&P 500 in 1987—the one that included the 21% drop on Black Monday, Oct. 19—but there have been four others, including 2011, when the S&P 500 fell 22% from its May high to its October intraday low, and the 23% tumble during the emerging market crisis of 1998. These bear markets tend to be shorter—a median of five months—and the drops smaller—“just” 26% on average. These, Verrone says, “are the road maps we should be familiar with.”
If there’s a silver lining, it’s that the market is a lot cheaper than it was a few months ago. The S&P 500 trades at 15.9 times 12-month forward earnings forecasts, notes Bank of America Merrill Lynch strategist Savita Subramanian, back where valuations were at the beginning of 2014. That means there are values to be had. She recommends looking at cash-rich companies, which have outperformed companies with heavy debt loads by 4.8 percentage points so far this year; investment-grade companies, which have outperformed their junk-rated counterparts by four percentage points; and high-quality companies, which have outperformed low-quality by four percentage points. Don’t expect that to change until the selling pressure finally comes to an end.
Then again, maybe we’ll get lucky. Maybe this is neither a black bear nor a grizzly but a koala—not a bear at all.
U.S. equities tanked for the third consecutive week, down another 2%. Investors were socked by high volatility, and the Standard & Poor’s 500 index finished in correction territory—defined as a drop of 10% or more from highs—for the second time since last August.
Once again, the debacle was blamed on fresh fears about slowing global and Chinese economic growth and on the now more than 16-month old slump in oil prices. Crude fell 11% last week to $29.42 per barrel. In June 2014, it was $107. That continues to take a painful toll on both the energy stock sector, down 2% last week and 44% since mid-2014, and the broader market as well.
Bank stocks fell into a bear market last week—defined as a 20% drop or more from highs—as investors expect the Federal Reserve will slow down the pace of interest-rate hikes.
Last week, the Dow Jones Industrial Average fell 2.2 that was a 358-point fall for the Dow, to 15,988.08. The S&P 500 Index fell 42-points to 1880.33—and off 12% from highs. The NASDAQ fell 3.3%, to 4488.42.
The volatility caused by oil and China derives from the same investor concern: the state of domestic and global demand, says Peter Kenny, independent equity strategist at Kenny and Co. Last year, the slow-but-steady U.S. economy was the rock upon which the market’s high was built. Now, he adds, the latest U.S. numbers—whether gross domestic product, retail sales, or industrial production—seem to suggest a waning economy.
Kenny says he is cautious near-term, adding “It’s not unreasonable to think we’ll flirt with a bear market.” Some sectors are already there, such as bank stocks and small companies. For the bull to return, the market needs demand to improve, the Fed to hold off, and oil to stabilize, he says.
He’s not alone: “Without an improvement in oil prices and energy stocks, it becomes very difficult for this market to rally,” adds JonesTrading market strategist Yousef Abbasi.
Normally, a Monday holiday would be welcome after such a week, but Abbasi notes a slew of Chinese data will be issued next week, including GDP and industrial production on Monday evening in the U.S. “If it’s light, it could send global demand expectations lower again.” The fourth-quarter earnings report season will be in full swing next week, too.
Friday, December industrial production fell for a third straight month, the Fed said, off 0.4% from November, and dragged down by utilities and mild weather. It was worse than the -0.2% consensus.
Not everyone is gloomy. David Kelly, chief global strategist at JPMorgan Asset Management says he expects the market turmoil to last two weeks or so, adding investors shouldn’t succumb to emotional reactions during these violent swings. The correction needs fuel to keep going, he says, but the state of China, oil prices, the U.S. economy, corporate earnings, and equity valuations don’t support the downdraft.
