Month: January 2016

Central bank activity and a continued rebound in the oil market led to another volatile trading week.

The Fed’s two-day policy meeting temporarily paused Wednesday’s rally with the Open Market Reserve’s 2p.m. statement detailing December’s slower-than-expected growth and the Fed’s reluctance to increase rates in March. Core inflation may underlie the Fed’s wariness to raise rates. Core CPI, which excludes food and energy, is already running at 2 percent, at the bottom end of the Fed’s 2- to 3-percent target range. Core inflation is far stickier than headline inflation, which can bounce with volatile commodity markets. The Fed may have rate reservations with core inflation at 2 percent; if oil prices return to $50 a barrel in the next year, headline inflation could reach 4 percent or higher, pushing core inflation well into the Fed’s range.

Investors and speculators are understandably cautious. Inflation expectations are at their lowest since 2009 and speculators in the interest rate futures market don’t see the odds of a rate hike reaching 50 percent until February 2017. Opinions and data can change rapidly, but in the near term, the Fed’s hawkish stance understandably leads to a decline in asset prices when the market is expecting low inflation and no rate hikes.

Investors didn’t have to wait long for a pick-me-up following the Fed’s report. One week after claiming the Bank of Japan would do nothing at this week’s meeting, BOJ Governor Kuroda announced the bank would cut interest rates to negative 0.10 percent. This immediately sent global stock markets higher and the yen tumbling versus the U.S. dollar.

The stock market (along with high-yield bonds) also benefited from recovering oil prices. Only a week after falling below $27 a barrel, the price for a barrel of the benchmark West Texas Intermediate Crude rose as high as $34.82. Russia helped to propel prices after stating its potential willingness to work with the Organization of Petroleum Exporting Countries (OPEC) in cutting output levels.

Mixed earnings also contributed to the week’s volatility. Facebook (FB) rallied nearly 20 percent in the two days following a strong earnings announcement. This gain offset weakness in Apple (AAPL) and Amazon (AMZN), both of which fell on the week following disappointing earnings reports and guidance. AAPL missed key metrics for sales of iPhones, while AMZN reported poor holiday sales relative to expectations. Oil conglomerate Chevron (CVX) announced its first quarterly loss since 2002, but it wasn’t enough to dent the energy sector’s rally. The pharmaceutical and biotech spaces saw mixed results from Abbot Labs (ABT), Amgen (AMGN), Biogen (BIIB), Celgene (CELG) and Bristol-Myers Squibb (BMY). Some biotechnology funds were hurt by the Massachusetts attorney general, who threatened Gilead (GILD) with a lawsuit if it didn’t cut prices on its hepatitis-C drug. On Friday, Merck (MRK) proved the market has the solution to high prices: competition. The firm launched a price war aimed at Gilead and AbbVie (ABBV), who also produces a drug for hepatitis-C. Merck’s announcement sent shares of its stock higher, helping lift the pharma sector, while Gilead and AbbVie retreated.

Finally, the big economic news of the week came from the Bureau of Economic Analysis. The BEA announced its first estimate of 2015 fourth quarter GDP growth: 0.7 percent. A decline in durable goods orders helped pull the number lower than economists had expected at the start of the quarter. In other economic news, sales of new homes surged 10.8 percent in December, well ahead of expectations. The upturn in housing suggests GDP growth may be revised higher when the BEA announces the second estimate at the end of February.

WisdomTree Chinese Yuan (CYB)
WisdomTree Bloomberg USD Bullish (USDU)
CurrencyShares Euro Trust (FXE)
CurrencyShares Swedish Krona (FXS)
CurrencyShares Canadian Dollar (FXC)
WisdomTree Emerging Market Currency (CEW)
PowerShares DB U.S. Dollar Bullish Index (UUP)

The bounce in oil prices over the past week has lifted the commodity-dependent Australian and Canadian dollars. Most major currencies, however, remain in a holding pattern. The U.S. Dollar Index is struggling to break clear of 100 and currencies such as the euro, krona and Australian dollar are holding near their lows. The yen has also paused following a small rally. Guggenheim CurrencyShares Japanese (FXY) is trading between $78 and $84, a range of about 8 percent. Traders have warmed to the yen since the rally, perhaps, in part, to hedge against market weakness. The Bank of Japan will meet on Friday. Recent comments by BOJ officials suggest the bank will not increase its quantitative easing policies.

The Chinese yuan has been stable following central bank intervention and could remain even through the Chinese New Year holiday, which begins in 10 days.

United States Oil (USO)
SPDR Energy (XLE)
FirstTrust ISE Revere Natural Gas (FCG)
Global X Copper Miners (COPX)
Market Vectors Coal (KOL)
Market Vectors Steel (SLX)
A week ago today, the price of oil sank below $27 a barrel. At one point in the past week, it climbed above $32 a barrel, for a low-to-high swing of about 20 percent. The rally was driven mainly by a reversal in sentiment, which reached extremely negative levels last week. Prices did receive a boost when an Iraqi oil minister claimed Saudi Arabia and Russia will cut production soon, but thus far it is only rumor.

Energy stocks have moved almost in lockstep with oil as investors expand the list of companies expected to cut their dividends. ConocoPhillips (COP) and the state-owned Chinese energy giants are the latest firms attracting analyst attention. Since higher yielding energy stocks are widely held by dividend-paying funds and income investors, a cut in the dividend can lead to further selling in energy stocks even if oil prices don’t continue to fall.

iShares Biotechnology (IBB)

IBB fell as low as $270 last week before bouncing back above $280. The Massachusetts Attorney General is threatening to sue Gilead (GILD) if it doesn’t lower the cost of its hepatitis C drug. Gilead is a top holding in biotechnology funds and this news sent shares to a 52-week low. A break of that low could invite further selling. This political risk tends to be short-lived, but since a lawsuit by the state could follow, this cloud could hang over the stock a bit longer.

SPDR Utilities (XLU)
SPDR Pharmaceuticals (XPH)
SPDR Materials (XLB)
SPDR Consumer Staples (XLP)
SPDR Consumer Discretionary (XLY)
SPDR Healthcare (XLV)
SPDR Technology (XLK)
SPDR Financials (XLF)

This week let’s look at the long-term relative performance of various sectors versus the S&P 500 Index. Healthcare and consumer discretionary have been clear leaders in the past, while energy and materials have lagged. Utilities and industrials have been in overall downtrends as well, while technology and consumer staples have been generally moving higher. Eventually, the underperforming sectors become relative bargains and reverse, but as we’re seeing in energy, the losses can still be substantial even after a very long period of underperformance.

iShares iBoxx High Yield Corporate Bond (HYG)
iShares iBoxx Investment Grade Corporate Bond (LQD)

High-yield bonds bounced sharply off their lows, rallying along with oil prices. Investment-grade bonds have struggled recently as investors demand better returns for taking on higher risk. The chart below reflects the 10-year treasury yield, including LQD (excluding dividends). Most of the time, LQD rises when the 10-year yield falls, but a wave of safe-haven treasury purchases began in December. Yields fell for treasuries, but not for investment-grade bonds, which may reinvigorate higher- yielding investment-grade bonds in the week ahead.

SPDR Gold (GLD)
Market Vectors Gold Miners (GDX)

Gold prices have rallied in the past week, aided by comments from European Central Bank President Mario Draghi, who said the ECB may do more to help the markets when officials meet in March. The Bank of Japan will meet on Friday. Today’s Federal Reserve statements confirmed analysts’ prediction that no rate hikes are immediately imminent. Fed Chair Yellen cautiously referred to slowed December growth and lower inflation, despite strong December housing and jobs data.

SPDR S&P 500 (SPY)
iShares Russell 2000 (IWM)
S&P Midcap 400 (MDY)
SPDR DJIA (DIA)
PowerShares QQQ (QQQ)
SPDR S&P Dividend (SDY)

Stocks have rebounded over the past week, but sentiment has yet to turn bullish. The small-cap Russell 2000 should lead a rally in stocks, but recently it bounced as much as the S&P 500. The mid-cap S&P 400 has bounced sharply over the past few days, which could hint at more bullishness in the week ahead.

The Dow has lagged due to earnings related slides in Boeing (BA), General Electric (GE) and Apple (AAPL). The dip in Apple today is also pulling the Nasdaq lower. Apple made a new closing low for the year, which is bearish for the stock in the near-term. Due to the weight of Apple in the Nasdaq, it will struggle versus the S&P 500 if the stock continues to slide.

Equity markets will try to carry last week’s momentum into this week after the S&P 500 Index rallied 5 percent from its midday lows on Wednesday to large gains on Friday. Shares in Asia and Europe rallied on Monday in reaction to Friday’s rebound. Oil rebounded as well, climbing 20 percent from low to high over the past three trading days, retreating, however, on Monday following Saudi Aramco’s announcement that it would not reduce investments in production. The U.S. equity markets also pulled back at the open on Monday. The dip in oil, a management shakeup at Twitter (TWTR) and a downgrading of Dow component Caterpillar (CAT), compounded Monday’s volatility. The abrupt exit of five top-level Twitter executives pulled TWTR shares down more than 6 percent. The company is also expected to announce a new marketing chief this week. Goldman Sachs anticipates continued weakness for CAT; shares have already fallen more than 40 percent from the peak set in mid-2014 and emerging market sales have been consistently weak since late 2012.

This week’s trading could hinge on the Federal Open Market Committee (FOMC) meeting that ends on Wednesday. Speculators were betting that a rate hike could come as soon as June, but now those odds have been pushed back to late 2016. Due to the drop in equities, however, investors will be looking to the FOMC statement for sentiment signals. If the Fed is focused on the economy, strong jobs data and core inflation will expedite the next rate hike. If instead the Fed is back to watching the markets, it could signal an indefinite delay. European Central Bank President Mario Draghi indicated last week that the ECB may wait until March to intervene, which led to further euro weakening. Later this week, the Eurozone core CPI for January will be released. Forecasts put core CPI at 0.9 percent and headline CPI at 0.4 percent.

Two different consumer surveys for January will be released this week, one on Tuesday and one on Friday. New home sales for December will be released on Wednesday, with the market expecting 503,000 homes sold. Durable goods orders and pending home sales for December will be out on Thursday. The initial estimate of fourth quarter GDP will be available on Friday. The average estimate calls for growth of 0.7 percent, as does the Atlanta Federal Reserve’s GDP Now model.

Earnings season is in full swing and individual company reports are influencing individual share prices. Last week, American Express (AXP) and General Electric (GE) both saw their shares substantially underperform the market following earnings reports that disappointed investors, despite the strong broad market rally. McDonald’s (MCD) overcame Monday’s tough market with upwards of 2 percent gains after toppling analysts’ fourth quarter earnings estimates. A number of blue chips will report this week, among them: Apple (AAPL), 3M (MMM), AT&T (T), DuPont (DD), Johnson & Johnson (JNJ), Proctor & Gamble (PG), Boeing (BA), Caterpillar (CAT), Microsoft (MSFT), Chevron (CVX), Visa (V), Honeywell (HON), Ford (F), Amgen (AMGN), Celgene (CELG), Biogen (BIIB), Abbvie (ABBV), Bristol-Myers (BMY), Abbot Labs (ABT), Facebook (FB) and Amazon (AMZN).

Apple is the largest stock by market capitalization and it is heavily overweight in the Nasdaq and 11.5 percent of PowerShares QQQ (QQQ), combining with MSFT, FB and AMZN, to represent 30 percent of QQQ. As noted above, investors appear to be reacting strongly to individual reports, so good or bad news from these firms will likely determine the Nasdaq’s performance this week. Technology funds, including the Internet subsector, consumer staples, chemicals, biotechnology and pharmaceuticals will also be impacted by this week’s reports. About 25 percent of Fidelity Select Pharmaceuticals (FPHAX) is invested in JNJ, ABBV and BMY. Growth-oriented funds are also likely to be affected by the heavy presence of large-cap tech and biotech in this week’s earnings reports.

Equity markets closed out the week with a strong rally. The rebounds in some markets have been quite sizable as oil rebounded approximately 15 percent from its lows. The S&P 500 is set to rally as much as 5 percent from Wednesday lows. Most earnings are exceeding expectations and extreme negative sentiment looks to have peaked on Wednesday, at least for the short-term.

Many markets started the week “oversold”, with technical traders looking for a reversal. By Wednesday, some investors were in panic mode as they piled into government bonds, but this move peaked at lunchtime. Since then, the market has been in rebound mode and it’s been getting help from the European Central Bank. On Thursday, ECB President Mario Draghi hinted at the central bank’s intent to do more at the March meeting. The ECB is seeking higher inflation, but tumbling commodity prices and falling asset prices are likely to put a damper on inflation in Europe. Adding more liquidity could boost prices at the expense of a weaker euro, and it was successful as a strategy in 2015. European equities did well for most of last year after quantitative easing was started in January 2015. Investors who hedged currency fared even better.

U.S. inflation is comparatively high. Although headline inflation fell in December and is only up 0.7 percent in the past year, a big chunk of which was comprised of falling energy prices. Shelter, which is about one-third of the CPI, is rising at a 3.2 percent annualized pace. Medical services are also rising at a healthy clip of 2.9 percent. Core inflation, which strips out food and energy, was up 2.1 percent in 2015. Given the current state of the commodity markets and the drop in financial assets, inflation is the farthest thing from investors’ minds, but the data suggests things could change very quickly after prices bottom.

Existing home sales jumped sharply in December, up 14.7 percent. Numbers had been down in November and some analysts speculated new mortgage rules were the culprit. The spike in sales indicates they were right. Home prices tend to follow sales volume and this increase is good news for the economy, but it could also put further upward pressure on core inflation.

This was the first full week of earnings season and there were several big reports. Bank of America (BAC) beat earnings estimates for the quarter and saw earnings rise more than 250 percent in 2015, primarily due to the end of litigation expenses, which has fueled rising bank earnings across the sector. Netflix (NFLX) followed with a large earnings beat, reporting 7 cents versus the expected 2 cents. Revenue was slightly below estimates, but overall revenue increased 22 percent versus the year-ago quarter. Shares of Netflix headed lower though, due to slowing subscriber growth in the U.S. and the higher cost associated with adding subscribers overseas. In contrast to Netflix, Verizon (VZ) saw strong customer growth in its wireless division, helping it to beat earnings and send shares higher on the week.

Starbucks (SBUX) beat earnings by a penny, but investors were concerned by slower-than-expected growth in China, plus contraction in Europe.  UnitedHealth Group (UNH) beat earnings estimates, but earnings were down in part due to costs associated with the Affordable Care act. The firm doesn’t have many customers under the ACA, only about 500,000, but it may quit the program after this year due to high costs.

One of the reasons why the market fell into Wednesday was guidance from International Business Machines (IBM). After the bell on Tuesday, the company said it expected to earn $13.50 per share in 2016, below the average forecast of $15.00 per share. The firm blamed the strong dollar in part, but the firm’s shift away from low-margin hardware to high-margin software services is also taking time to pay off.

The week ended with industrial giant and Dow component General Electric (GE) beating estimates by 6 percent, though industrial earnings were down due to low oil prices. Of GE’s eight industrial divisions, five reported a decline in profit. Similar to the earnings growth for the S&P 500 Index, which will likely be down in the fourth quarter due to falling energy profits, GE’s oil and gas division reported a 16 percent drop in earnings pulling the entire industrial division’s earnings growth to negative 1 percent. The firm also missed on revenue estimates as a result.

A market drop can provide a good gut check for investors. If the recent turmoil created a lot of stress or sleepless nights, your risk tolerance is probably lower than you believed. Too many investors overreact to this situation in the short-term, taking drastic steps to reduce pain immediately while ignoring the long-term costs. The best first step is reviewing your portfolio holdings for anything that may be generating a large amount of risk and to reassess your allocation between stocks and bonds. A return to normal volatility may be jarring to investors since we haven’t seen much market action since the 1990s, but a well-planned response will protect and grow your investments in a new long-term, higher-rate environment.

Few can predict the bottom in the stock market, but the CRB Index of commodity prices is already back at levels seen in the early 1970s. China is a question mark due to their economic and currency issues, but the Hang Seng Index in Hong Kong is already trading below book value for the first time since 1998, when the Asian Crisis was in full bloom. It’s impossible to say if a bottom is in or not, but many assets are historically cheap. A well-diversified portfolio and sensible investment plan are key components in keeping your mind free of worry and focused on the growing list of long-term opportunities. If you would like a complimentary review of your investment portfolio, please contact me directly at (844) 336-9878.