Market Week: January 25, 2016

January 25th, 2016

The Markets

Boosted by a jump in oil prices and a rally in the European markets, U.S. stocks enjoyed their first week of gains in a month. Global stocks responded favorably to news from the European Central Bank that more stimulus could be forthcoming. Colder weather may have led to an increase in demand for oil, shooting prices above $30, closing at $32.13 (WTI) a barrel. On the whole, each of the indexes listed here showed gains week-on-week, although each index remains in negative territory year-to-date. Bond yields for 10-year Treasuries, which had dropped below 2.0% earlier in the week, climbed to a little over 2% as prices dipped toward the end of the week.

The price of gold (COMEX) fell from last week’s close, selling at $1,098.50 by late Friday afternoon, down from the prior week’s closing price of $1,104.10. The national average retail regular gasoline price decreased to $1.914 per gallon on January 18, 2016, $0.082 below the prior week’s price and $0.152 under a year ago.

Market/Index

2015 Close

Prior Week

As of 1/22

Weekly Change

YTD Change

DJIA

17425.03

15988.08

16093.51

0.66%

-7.64%

Nasdaq

5007.41

4488.42

4591.18

2.29%

-8.31%

S&P 500

2043.94

1880.33

1906.90

1.41%

-6.70%

Russell 2000

1135.89

1007.72

1020.77

1.30%

-10.13%

Global Dow

2336.45

2127.02

2135.79

0.41%

-8.59%

Fed. Funds

0.50%

0.50%

0.50%

0 bps

0 bps

10-year Treasuries

2.26%

2.03%

2.05%

2 bps

-21 bps

Chart reflects price changes, not total return. Because it does not include dividends or splits, it should not be used to benchmark performance of specific investments.

Last Week’s Headlines

·
Home builders maintained confidence in the new home market, according to January’s preliminary Housing Market Index from the National Association of Home Builders. The index for January, at 60, is unchanged from December’s downwardly revised reading. An index reading above 50 represents improvement, and a reading in the low 60s is indicative of gradual improvement.

·
Both housing starts and building permits for privately owned housing units dipped in December following November’s surge, according to the latest report from the Census Bureau. Housing starts (marked by the actual beginning of construction) fell 2.5% below November’s figure, while the number of building permits issued dropped 3.9%. Nevertheless, both housing starts (6.4%) and permits (14.4%) are ahead of their respective numbers for December 2014. And housing completions in December were 5.6% above the revised November estimate and 7.9% ahead of December 2014.

·
Existing home sales rebounded in December, according to the latest information from the National Association of Realtors®, which saw the index jump to a seasonally adjusted annual rate of 5.46 million–an increase of 700,000 over November. Lawrence Yun, chief economist for the NAR notes that December’s sales figures close the best year of existing home sales since 2006. The median existing-home price for all housing types in December was $224,100, up 7.6% from December 2014 ($208,200). Last month’s price increase marks the 46th consecutive month of year-over-year gains.

·
Falling prices in energy (-2.4%) and food (-0.2%) led to an overall decline in the Consumer Price Index, which fell 0.1% in December. The index for all items less food and energy rose 0.1% in December, its smallest increase since August. The all items index rose 0.7% over the last 12 months, compared to the 0.5% 12-month increase for the period ending November. The latest figures highlight the continuing lack of inflationary pressure–something the FOMC may consider when it meets later this month.

·
U.S. manufacturers started the year with a rebound in output and new business growth from the lows seen during December, resulting in Purchasing Managers’ Index™ (PMI) of 52.7 in January–up from December’s PMI of 51.2. While the latest index signals moderate improvement in overall business conditions, it is still the second-lowest index since October 2013.

·
For the week ended January 16, there were 293,000 initial claims for unemployment insurance, an increase of 10,000 from the prior week’s revised total. For the week ended January 9, the advance number for continuing unemployment insurance claims was 2,208,000, a decrease of 56,000 from the previous week’s revised level. The advance seasonally adjusted insured unemployment rate remained at 1.6% for the week ended January 9.

Eye on the Week Ahead

So far, 2016 has been anything but kind to market investors. This week’s reports on new home sales, durable goods, and the GDP, as well as updates from the latest FOMC meeting, could offer some indication as to the direction of the economy in general, and equities markets in particular for the weeks ahead.

Data sources: News items are based on reports from multiple commonly available international news sources (i.e. wire services) and are independently verified when necessary with secondary sources such as government agencies, corporate press releases, or trade organizations. Market data: Based on data reported in WSJ Market Data Center (indexes); U.S. Treasury (Treasury yields); U.S. Energy Information Administration/Bloomberg.com Market Data (oil spot price, WTI Cushing, OK); www.goldprice.org (spot gold/silver); Oanda/FX Street (currency exchange rates). All information is based on sources deemed reliable, but no warranty or guarantee is made as to its accuracy or completeness. Neither the information nor any opinion expressed herein constitutes a solicitation for the purchase or sale of any securities, and should not be relied on as financial advice. Past performance is no guarantee of future results. All investing involves risk, including the potential loss of principal, and there can be no guarantee that any investing strategy will be successful.

The Dow Jones Industrial Average (DJIA) is a price-weighted index composed of 30 widely traded blue-chip U.S. common stocks. The S&P 500 is a market-cap weighted index composed of the common stocks of 500 leading companies in leading industries of the U.S. economy. The NASDAQ Composite Index is a market-value weighted index of all common stocks listed on the NASDAQ stock exchange. The Russell 2000 is a market-cap weighted index composed of 2,000 U.S. small-cap common stocks. The Global Dow is an equally weighted index of 150 widely traded blue-chip common stocks worldwide. Market indices listed are unmanaged and are not available for direct investment.

Facing Volatility

January 22nd, 2016

Over the last few years, we have faced a variety of challenges in the market. Times of stress spark the need for discussion, reassurance, and often, historical context. In 2013, we started the year worried about the impending fiscal cliff, and later watched as the market had its “taper tantrum” over uncertainty regarding the Federal Reserve’s (Fed) actions. In 2014, the focus was on the harsh winter’s impact on the economy, and the market sell-off due to the Ebola outbreak and rise of the Islamic State militants. And last year, second-half fears triggered by the decline in oil prices, weakness in manufacturing, and a slowdown in China captured our attention.

There is one common denominator among all of these topics and varying market challenges: fear. They all triggered a strong emotional reaction. Emotion is the most powerful fuel in humans. It drives us to love, to mourn, to cheer our favorite team, and to scream during horror films. Emotion is what makes life more than just a day-to-day routine; it makes it an adventure—full of rewards and sometimes disappointments. And while fear is not something we typically embrace, it is a necessary emotion. It helps us stay alert and seek security—whether that means locking our doors at night or increasing a life insurance policy after starting a family. However, in investing, emotion is often counterproductive to what it takes to be successful.

In an average lifetime, say about 80 years, we will experience roughly 9,000 down market days. We will experience about 13 recessions, approximately 20 bear markets, and too many pullbacks and corrections to even count. That is a lot of market declines. And every one of them will be marked with fear, worry, and the instinctive urge to seek safety. But history has shown that investing with fear as the catalyst is not a successful strategy. After all, very few of those 9,000 down market days in our life are actually a “Lehman Brothers” moment. Furthermore, fear causes us to sell at or near market bottoms and, more often than not, miss opportunities rather than add value with downside protection.

We are currently going through one of these periods of fear. This is best evidenced by examining investor surveys, such as the American Association of Individual Investors (AAII), which this week reported that bulls came in at only 18%, the lowest reading in nearly 11 years. Think about that last statement. The percentage of bullish/optimistic investors is at the lowest level in over a decade. That means that there are fewer bullish investors right now than at any time during the Great Recession. Meanwhile, the percentage of bears spiked up to 45%, the highest level in nearly three years. This degree of pessimism and the increased level of market volatility suggest to us that most of the potential stock market decline may be behind us.

Lately, China and oil are the most often cited catalysts for the fear. The oil market remains oversupplied, and we would not expect a major rally in oil until supply comes off the market. However, we do not think that low oil prices, in and of themselves, will cause a recession in the U.S. or lead to systemic contagion, such as what occurred during the financial crisis. Looking to China, the world’s second-largest economy is rebalancing to be more consumption based and less reliant on construction and infrastructure. This transition has been painful. However, China also has vast resources to ease this transition. Should China acknowledge its shortcomings and take concrete steps to fix its economy, this should boost, not further hinder, the global economy.

The challenges and consequences of declining oil prices and a slowing China are not new. Rather, the market has violently shifted from broadly accepting these risks to a virtual abhorrence of them. This is a common market paradigm, where market negatives can be accepted, even embraced, for long periods of time before suddenly becoming major concerns, sparking a sell-off. In a sense, a lack of confidence is driving a full repricing of risk, and that is being reflected in lower values for stocks. Although this is a scary experience, these are the periods where short-term panic can potentially lead patient investors to long-term profit.

With U.S. stocks firmly in correction camp and many segments already in a bear market (Japan, Europe, small cap stocks, etc.), we believe that selling pressure on stocks is moving to extreme levels. At these extremes, the market tends to ignore all positive news and focus (and reprice) purely based on the worst case scenario. However, we do not forecast that a worst case scenario is currently the highest probability event. In fact, we see the likelihood of a recession in the U.S. at roughly 20%, higher than a few months ago but still relatively remote. Supporting our view is the fact that corporate America, outside of the challenged energy sector, remains in very good shape and, we believe, is in a good position to grow profits in 2016—despite the drags from the energy sector, a strong U.S. dollar, and slower growth in China.

While we do not know for certain what lies ahead for this market, we believe the best course of action is to face it with a steadfast commitment to your investment plan; and instead of reacting to the urges of fear, maintain a patient, long-term orientation to the future.

As always, if you have any questions, we encourage you to contact us.

Sincerely,
Westside Investment Management

Oil and the Markets

January 21st, 2016

When did falling oil prices become a bad thing? Other than oil-rich companies and countries, the world benefits from cheaper energy. So why is everything falling along with oil?
The connections are too complex to detail here, and involve a lot of irrational fears as well as economic facts. But while the rest of the world frets about falling oil prices, keep the following in mind:

1. Low oil prices have never led to a recession in the past. On the contrary, it’s high oil prices that often precede recessions. Before the great recession of 2007-2009, we had very high oil prices, which fell only after the recession took hold. So the idea that low oil prices presage a global recession appears misguided.
2. Oil prices are low mainly because Saudi Arabia is pumping out more oil than the world needs in an attempt to put higher-cost produces out of business and gain market share (they did the same thing in the late 1980s). So far, it’s working, as non-OPEC production has declined in almost every month since last May. Even with Iran coming online, oil could be in supply-demand balance in just a few more months.[1]
3. Even if oil prices stay low for a long time, that doesn’t mean the stock market will. Oil prices were low and/or falling from 1982 through 2000, and we all know how well the stock market did back then. Even oil company stocks went up impressively during that period.

But given that recently equity markets appear to have been tracking the price of oil, you might ask: When will oil prices stop falling?

If we could give you the exact date and price, none of us would need to work. The reality is that no one can predict oil prices any more than stock prices—at least in the short term—so we’re not going to hazard a guess. But there are a few signs that we’re near the bottom, such as recent price forecasts.

When price predictions become downright silly, the end of a decline is usually close. And recent predictions have been just that. We’ve had $20 from Morgan Stanley and $10 from Standard Chartered Bank. Not to be outdone, actuary Gail Tverberg hinted on her blog that oil prices might fall to $0 or even below.[2] Come on, free energy? In your dreams!

So oil prices may be near a bottom, and should increase over time as drillers continue to reduce output in reaction to low prices. The long-term equilibrium price for oil, assuming no major change in demand and no supply shocks (such as a Mideast war), is between $65 and $75 a barrel based on production costs. So this is our target price when the market is again in balance and traders stop acting crazy.

In short, low oil prices aren’t likely to tank the economy or the stock market. At some point, hopefully soon, investors will come to their senses and drive stock prices (probably along with oil) back up.

Dr. Ken Waltzer, MD, MPH, AIF®, CFA, CFP®
Managing Director, KCS Wealth Advisory
Laura Gilman, CFP®, PFP, MBA
Managing Director, KCS Wealth Advisory
Adam Bragman, CFA
Director of Investment Research, KCS Wealth Advisory

Market Week: January 21, 2016

January 21st, 2016

The Markets

Last week was a perfect storm of bad news for investors, as China’s continuing economic and stock market woes and the ongoing plunge in oil prices–combined with a stream of disappointing news about the U.S. economy–sparked yet another sharp selloff. Markets took a beating, with the Russell 2000 index leading the way (-3.68%). Both the Russell 2000 and the Nasdaq are down more than 10% for the first two weeks of 2016.

Crude oil closed below $30 a barrel, settling at $29.42. Concerns about sanctions being lifted in Iran, which observers worry will exacerbate the current oversupply situation, helped fuel the price plunge. The national average regular retail gas price dropped to $1.996 on January 11, $0.032 less than the previous week and $0.143 lower than a year ago.

Gold prices rose and Treasury yields dropped toward week’s end, as investors sought relative safety. Gold closed at $1,088.60 an ounce, while the benchmark 10-year Treasury lost 8 basis points from a week prior.

Market/Index

2015 Close

Prior Week

As of 1/15

Weekly Change

YTD Change

DJIA

17425.03

16346.45

15988.08

-2.19%

-8.25%

Nasdaq

5007.41

4643.63

4488.42

-3.34%

-10.36%

S&P 500

2043.94

1922.03

1880.33

-2.17%

-8.00%

Russell 2000

1135.89

1046.20

1007.72

-3.68%

-11.28%

Global Dow

2336.45

2189.48

2127.02

-2.85%

-8.96%

Fed. Funds

0.50%

0.50%

0.50%

0 bps

0 bps

10-year Treasuries

2.26%

2.11%

2.03%

-8 bps

-23 bps

Chart reflects price changes, not total return. Because it does not include dividends or splits, it should not be used to benchmark performance of specific investments.

Last Week’s Headlines

·
According to the Bureau of Labor Statistics (BLS), job openings changed minimally in November, rising to 5.43 million from October’s reading of 5.35 million. Hires and separations were also little changed. Within separations, the quits rate was 2.0% and the layoffs and discharges rate was 1.2%. Over the 12 months ended in November, job openings rose 11%, with the largest increases in health care and social assistance and
accommodation and food services.

·
The Federal Reserve “beige book” reported modest growth in 9 of its 12 districts for the latter part of 2015 into 2016. New York and Kansas City reported growth as “essentially flat,” and contacts from Boston were “upbeat.” Expectations for future growth were positive in Boston, Philadelphia, Chicago, Atlanta, Dallas, and Kansas City.

·
The U.S. Treasury reported that the budget deficit was $14.4 billion in December, down from $64.6 billion in November. Fiscal year to date, the deficit totals $216 billion, compared to $177 billion for the same period last year.

·
Import prices fell 1.2% in December, the largest monthly drop since August 2015, reported the BLS. The decline was driven mainly by fuel import prices, which fell a precipitous 9.5% in December following a 3.5% drop in November. (Fuel import prices fell 40.5% in 2015, following a 29.1% drop in 2014.) Imports excluding fuel fell 3.4% in 2015, the largest drop since the index was first published in 2001. Exports fell 1.1% in December, also the largest monthly decline since last August. Both agricultural and nonagricultural exports fell 1.0% during the month. Export prices dropped 6.5% in 2015, the largest annual decline since the index was first published in 1983.

·
The BLS also reported a decline of 0.2% in the Producer Price Index for final demand in December, compared to an increase of 0.3% in November. The December dip was attributed to a 0.7% decline in the prices of goods, largely resulting from falling gas prices. Services rose 0.1%. For the year, the index fell 1.0%, compared to an increase of 0.9% in 2014.

·
U.S. retail and food services sales posted a monthly drop of 0.1% during the all-important shopping month of December, recording a total of $448.1 billion, reported the Department of Commerce. Total sales for 2015 were up just 2.1%, which was the smallest annual increase since 2009. The biggest annual gainers were sporting goods, hobby, book and music stores (7.6%); nonstore retailers (7.1%); food and drink establishments (6.7%); and motor vehicles (6.3%).

·
The Federal Reserve reported that industrial production declined 0.4% in December, primarily due to cutbacks in utilities and mining. This was the third consecutive monthly decline. November figures were also revised downward, to a drop of 0.9% from a previously estimated 0.6%. Year-over-year, production was down 1.8%. Capacity utilization for manufacturing was 76.0% in December 2015, 2.5% lower than its long-term average.

·
A bright note last week came from the University of Michigan’s Surveys of Consumers, which said that the preliminary reading for the Index of Consumer Sentiment was 93.3 for January, compared to 92.6 for December. This is the fourth month in a row that consumer sentiment rose. Chief Economist Richard Curtin attributed the growth to continuing levels of low inflation.

·
According to the Department of Commerce, business inventories fell 0.2% in November from October, but were up 1.6% over the previous 12 months. Sales also fell 0.2% from October and were down 2.8% year-over-year. The inventories/sales ratio in November was 1.38, compared to 1.32 a year prior.

·
Unemployment benefit applications totaled 284,000 for the week ended January 9, a rise of 7,000 from the previous week. This is the second-highest level since July. The advance number for seasonally adjusted insured unemployment during the week ended January 2 was 2,263,000, which was 29,000 higher than the previous week.

Eye on the Week Ahead

Investors will continue to monitor the China-and-oil drumbeat, as well the continuing flow of corporate earnings reports. This week’s economic releases include key reports on housing, inflation, and manufacturing.

Data sources: News items are based on reports from multiple commonly available international news sources (i.e. wire services) and are independently verified when necessary with secondary sources such as government agencies, corporate press releases, or trade organizations. Market data: Based on data reported in WSJ Market Data Center (indexes); U.S. Treasury (Treasury yields); U.S. Energy Information Administration/Bloomberg.com Market Data (oil spot price, WTI Cushing, OK); www.goldprice.org (spot gold/silver); Oanda/FX Street (currency exchange rates). All information is based on sources deemed reliable, but no warranty or guarantee is made as to its accuracy or completeness. Neither the information nor any opinion expressed herein constitutes a solicitation for the purchase or sale of any securities, and should not be relied on as financial advice. Past performance is no guarantee of future results. All investing involves risk, including the potential loss of principal, and there can be no guarantee that any investing strategy will be successful.

The Dow Jones Industrial Average (DJIA) is a price-weighted index composed of 30 widely traded blue-chip U.S. common stocks. The S&P 500 is a market-cap weighted index composed of the common stocks of 500 leading companies in leading industries of the U.S. economy. The NASDAQ Composite Index is a market-value weighted index of all common stocks listed on the NASDAQ stock exchange. The Russell 2000 is a market-cap weighted index composed of 2,000 U.S. small-cap common stocks. The Global Dow is an equally weighted index of 150 widely traded blue-chip common stocks worldwide. Market indices listed are unmanaged and are not available for direct investment.

Timely WealthWisdom; Keep Calm And Step Forward

January 18th, 2016

A good friend, Sherman Doll, related the following story. Sherman has been a two-line sport kite flier for years. While not a pro, he has learned a few tricks from observing the flying behavior of these kites. He told me that one of the most difficult skills for beginners to master is what to do when their kite starts to plunge earthward.

The natural, panicky impulse is to yank backward on the lines. However, this action only accelerates the kite’s death spiral. The effective, kite-saving technique is to calmly step forward and thrust out your arms. This causes the kite’s downward acceleration to stop, allowing you to regain control and end its plunge. What does this have to do with investing?

2016’s Grim Beginning

As you may already have observed, 2016 got off to a bad start for equity markets around the globe. In fact, for the S&P 500 Index, the first five trading days were the worst-ever start to a year, with a loss of 6%.

Combined with the weak performance of global equities in 2015, and all the geopolitical turmoil in the world, the stomachs of many investors started to rumble, especially upon hearing pronouncements from market “gurus” forecasting doom and gloom.

For example, George Soros is predicting a crisis similar to the one we had in 2008, with problems in China being the trigger. And it certainly doesn’t help when respected investors such as Jeremy Grantham and Carl Icahn are proclaiming that the market is vastly overvalued.

Over the 20 years that I’ve been providing investment advice, I’ve learned that when we have situations like the one we’re in now, many investors begin to “catastrophize.” They begin to focus solely on the negative news—such as ignoring the 292,000 increase in employment, along with an upward revision of 50,000 to the prior month’s gains, reported on the fifth day of trading in 2016. These investors begin to anticipate everything that could possibly go wrong, and end up in a loop of worry and anxiety that leads at best to indecisiveness and at worst to panicked selling.

Now, returning to my friend’s story about flying kites …

Just as when a kite starts to plunge earthward and the natural, panicky reaction is to yank backward on the lines, the natural, panicky reaction to a dive in your portfolio’s value is to pull back (sell). In both cases, pulling back is the wrong strategy. The right strategy is the less intuitive one. It involves the choice to remain calm and step forward (actually buying stocks to rebalance your portfolio back to your desired asset allocation).

Buffett’s Advice

Warren Buffett is probably the most highly regarded investor of our era. Read his statements carefully regarding efforts to time the market:

* “Inactivity strikes us as intelligent behavior.”
* “The only value of stock forecasters is to make fortune-tellers look good.”
* “We continue to make more money when snoring than when active.”
* “Our stay-put behavior reflects our view that the stock market serves as a relocation center at which money is moved from the active to the patient.”

And finally, Buffett recommends that if you simply cannot resist the temptation to time the market, then you “should try to be fearful when others are greedy and greedy only when others are fearful.”

While it is tempting to believe that there are those who can predict bear markets and, therefore, sell before they arrive, there is no evidence of the persistent ability to do so. On the other hand, there is a large body of evidence suggesting that trying to time the markets is highly likely to lead to poor results.

For example, a study on the performance of 100 pension plans that engaged in tactical asset allocation (a fancy term for “market timing,” allowing the purveyors of such strategies to charge high fees) found that not one single plan benefited from their efforts. That is an amazing result, as even random chance would lead us to expect at least some to benefit.

Avoiding Investment Depression

If you’re prone to investment depression, one way to help avoid the downward spiral that many investors experience (which can lead to panicked selling) is to envision good outcomes.

To help you do just that, I have gone to my trusty videotape and come up with some data that should not only be of interest, but should also enable you to envision positive outcomes. My thanks to my colleague, Dan Campbell, for producing the data, which covers the 89-year period from 1926 through 2014.

* There were 33 years (or 37% of them) in which the S&P 500 Index produced a loss during the first quarter. By the end of 18 of those years (or 55%), the S&P 500 had produced a gain. Of those 18 years, the highest return occurred in 1933, when the S&P 500 returned 54%. The best performance during the last three quarters in each of those years was also in 1933, when the S&P 500 returned 79.2%. The last time the first quarter ended in negative territory but full-year returns turned positive was just recently, when in 2009, the first quarter finished with a return of -11% and went on to recover for full-year gains of 26%.
* There were 31 years (or 35% of them) in which the S&P 500 Index produced a loss during the first six months. By the end of 11 of those years (or 35%), the S&P 500 had produced a gain. Of those 11 years, the highest return occurred in 1982, when the S&P 500 returned 21.4%. The best performance over the last half in each of those years was also in 1982, when the S&P 500 returned 31.7%.
* There were 24 years (or 27% of them) in which the S&P 500 Index produced a loss during the first nine months. By the end of four of those years (or 17%), the S&P 500 had produced a gain. Of those four years, the highest return occurred in 1982, when the S&P 500 returned 4.0%. The best performance over the last quarter in each of those years occurred just recently, when in 2011, the S&P 500 returned 11.8% over the last three months.

Summary

Warren Buffett has accurately stated that “investing is simple, but not easy.” The simple part is that the winning strategy is to act like the lowly postage stamp, which adheres to its letter until it reaches its destination. Similarly, investors should stick to their asset allocation until they reach their financial goals.

The reason investing is hard is that it can be difficult for many individuals to control their emotions (greed and envy in bull markets, and fear and panic in bear markets). In fact, I’ve come to believe that bear markets are the mechanism by which assets are transferred from those with weak stomachs and without an investment plan to those with well-thought-out plans—meaning they anticipate bear markets—and the discipline to follow those plans.

A necessary condition for staying disciplined is to have a plan to which you can adhere. But that’s not sufficient. The sufficient condition is that you must be sure your plan avoids taking more risk than you have the ability, willingness and need to take. If you exceed any of those, you just might find your stomach taking over. The bottom line: If you don’t have a plan, develop one. If you do have one, and it’s well-thought-out, stick to it.

Selwyn Gerber

No Bull…

January 15th, 2016

…to be found. Almost everybody is a bear these days, anticipating even more declines after the worst start to a year for global stocks ever. Today’s market action certainly isn’t helping; at one point the Dow was down over 500 points.

To us, though, this pervasive pessimism is causing green shoots to sprout in a field of red. That’s because about the time when investors become most despondent is when markets tend to turn around. And the more negative people become, the stronger the rebound tends to be.

Just how bearish are investors today? We follow a number of sentiment indicators, all of which tend to be most useful at market bottoms rather than tops. One particularly helpful sentiment survey is conducted by the AAII (American Association of Individual Investors). Each week they ask their members to vote on what they “feel that the direction of the stock market over the next 6 months will be.”

If they think it will go up, they’re bullish, down they’re bearish, and no opinion, neutral. On average, 38.7% are bullish. This week, that number is 17.9% (and that was before today’s big drop). How low is this? The last time the bullish percentage was this low was in April 2005, almost 11 years ago.[1] Even at the depths of the great 2007–2009 bear market, on March 5, 2009, the bullish percentage wasn’t quite this low, measuring 18.9%. And we all know what the market did over next several years.

It makes sense to be a pessimist when everything seems to be crumbling around you—that’s human nature. But stock market history tells us that it’s at those times when everyone else is throwing in the towel that you should be a buyer. And today appears to be one of those times. The market may not turn around right away, but our various indicators suggest that a rebound won’t be far off. And given the current level of pessimism, it could be a powerful one.

[1] http://www.aaii.com/sentimentsurvey

Dr. Ken Waltzer, MD, MPH, AIF®, CFA, CFP®
Managing Director, KCS Wealth Advisory

Laura Gilman, CFP®, PFP, MBA
Managing Director, KCS Wealth Advisory

Adam Bragman, CFA
Director of Investment Research, KCS Wealth Advisory

Happy New Year!?

January 13th, 2016

During the first week of 2016, world stock markets fell sharply, and the S&P 500 had its worst opening week ever. How does this bode for the rest of the year? According to Wall St Journal data, the predictive value of a declining first week is almost exactly 50/50[1]. So flip a coin: heads, 2016 will be an up year, tails, stocks will fall. We favor heads (an up year), in part because:

Little noticed by most investors, stocks worldwide have been in a bear market for the past 18 months. The broader indexes—especially those in the US—have been held up by a small number of big companies. So while the S&P 500 is down just –10% (as of January 8) from its high of last May, the average US stock is down –27% during the same period[2].

If you look at specific sectors and countries, the damage is even worse. Global energy stocks are down an eye-popping –48% from their high of late June 2014[3]. And the broad non-US stock index hit its high just a few days after energy, on July 2, 2014, and is down –20.8% over the past 18 months[4]. Few would argue that these declines are not in bear market territory.

To us, this is a good thing. Why? Because all bear markets eventually end, to be followed by bull markets. And perhaps not coincidentally, the average duration of bear markets since 1929 has been 18 months[5], So perhaps this one has finally run its course and we can look forward to some serious stock price appreciation in the near future. That’s what history would suggest.

The best investors know that you can’t time the market, but they also know that the best times to buy (or hold, if you’re already invested) is when everybody else is selling. And investors have clearly been selling, not for just a week, but for 18 months. We think that conditions are now ripe for them to switch to buying.

Dr. Ken Waltzer, MD, MPH, AIF®, CFA, CFP®
Managing Director, KCS Wealth Advisory
Laura Gilman, CFP®, PFP, MBA
Managing Director, KCS Wealth Advisory
Adam Bragman, CFA
Director of Investment Research, KCS Wealth Advisory

Market Week: January 12, 2016

January 12th, 2016

The Markets

Last week began with both domestic and global markets hitting the skids amid concerns over China’s stock market plunge, North Korea’s apparent nuclear testing, and falling oil prices. A favorable employment report at the end of the week may have helped stem the downward tide, but not nearly enough to prevent the market from registering one of its worst weeks in memory. The Dow lost over 1,000 points from last week’s December 31 close, while the S&P 500 dropped almost 6%. The Nasdaq and Russell 2000 also fell by more than 7%.

New information on China’s receding economy sent its stock market spiraling as the government closed trading twice last week. The price of oil has fallen to its lowest level since 2004, further softening energy stocks, which negatively impacted the large-cap indexes.

The price of gold (COMEX) increased, selling at $1,104.10 by late Friday afternoon, up from $1,060.50 a week earlier. Crude oil (WTI) prices also dropped, selling at $32.88 per barrel by week’s end. The national average retail regular gasoline price decreased to $2.028 per gallon on January 4, 2016, $0.006 below the previous week’s price and $0.186 under a year ago.

Market/Index

2015 Close

Prior Week

As of 1/8

Weekly Change

YTD Change

DJIA

17425.03

17425.03

16346.45

-6.19%

-6.19%

Nasdaq

5007.41

5007.41

4643.63

-7.26%

-7.26%

S&P 500

2043.94

2043.94

1922.03

-5.96%

-5.96%

Russell 2000

1135.89

1135.89

1046.20

-7.90%

-7.90%

Global Dow

2336.45

2336.45

2189.48

-6.29%

-6.29%

Fed. Funds

0.50%

0.50%

0.50%

0 bps

0 bps

10-year Treasuries

2.26%

2.26%

2.11%

-15 bps

-15 bps

Chart reflects price changes, not total return. Because it does not include dividends or splits, it should not be used to benchmark performance of specific investments.

Last Week’s Headlines

·
The final U.S. labor figures for 2015 revealed that the employment sector enjoyed one of its best years in the last decade as nonfarm payrolls increased by 292,000 in December, while the unemployment rate remained at 5% for the third month in a row. According to the Bureau of Labor Statistics, gains in the job market occurred in several industries, led by professional and business services, construction, health care, and
food services and drinking places. Mining employment continued to decline. The number of unemployed persons, at 7.9 million, was essentially unchanged in December, and for the past 12 months, the unemployment rate and the number of unemployed persons were down by 0.6 percentage point and 800,000, respectively. Adding to the favorable employment situation, revisions to October and November added more jobs for each month than previously estimated. While the average hourly earnings for all private-sector employees fell by a cent to $25.24 in December, over the past year, average hourly earnings actually rose 2.5%.

·
The manufacturing sector closed 2015 on a sour note. The Census Bureau’s latest report showed that new orders for manufactured goods in November decreased $1.1 billion, or 0.2%, from October. The news wasn’t much better for December, as the Institute for Supply Management® composite Purchasing Managers’ Index® contracted for the second consecutive month registering 48.2%, a decrease of 0.4 percentage point from November’s reading of 48.6%. And, according to the final seasonally adjusted Markit U.S. Manufacturing Purchasing Managers’ Index™, U.S. manufacturers ended the year by recording the weakest improvement in overall business conditions since October 2012, as the index fell to 51.2 in December, down from 52.8 in November. Chris Williamson, chief economist at Markit said, “The manufacturing sector saw a disappointing end to 2015, and its plight looks set to continue into the New Year as headwinds show no sign of abating any time soon.”

·
While the manufacturing sector may be showing signs of weakness, the non-manufacturing area (services, construction, mining, agriculture, forestry, fishing and hunting) grew in December, according to the latest Non-Manufacturing ISM® Report On Business®, which saw its non-manufacturing index register 55.3%. Any index reading of 50% or higher indicates growth. Nevertheless, while there was continued growth in December, it moved at a slightly slower rate than the prior month, which had a higher reading of 55.9%.

·
Spending on construction, estimated at a seasonally adjusted annual rate of $1,122.5 billion, decreased during November 2015, according to the latest figures from the Census Bureau. Spending in November was 0.4% below the revised October estimate of $1,127.0 billion. Spending in November on private construction (-0.2%) and public construction (-1.0%) were below their respective estimates for October 2015. Nevertheless, construction spending in November 2015 was 10.5% above the November 2014 estimate of $1,016.1 billion.

·
The international trade deficit narrowed by $2.2 billion in November compared to October, according to the Census Bureau’s latest report. The goods and services deficit for November was $42.4 billion, as exports were $182.2 billion ($1.6 billion less than October) and imports were $224.6 billion ($3.8 billion less than October). Year-to-date, the goods and services deficit increased $25.2 billion, or 5.5%, from the same period in 2014. Exports decreased $99.0 billion, or 4.6%, while imports decreased $73.7 billion, or 2.8%. The continued strength of the dollar has driven up prices for foreign buyers, further curtailing exports, while slumping oil prices have contributed to declining imports. Overall, these figures point to slowing global trade.

·
For the week ended January 2, there were 277,000 initial claims for unemployment insurance, a decrease of 10,000 from the prior week’s unrevised total. For the week ended December 26, the advance number for continuing unemployment insurance claims was 2,230,000, an increase of 25,000 from the previous week’s revised level. The advance seasonally adjusted insured unemployment rate was 1.6% for the week ended December 26.

Eye on the Week Ahead

Several important economic indicators are highlighted this week. Of particular interest are the latest reports on job openings, producer prices, retail sales, and industrial production.

Data sources: News items are based on reports from multiple commonly available international news sources (i.e. wire services) and are independently verified when necessary with secondary sources such as government agencies, corporate press releases, or trade organizations. Market data: Based on data reported in WSJ Market Data Center (indexes); U.S. Treasury (Treasury yields); U.S. Energy Information Administration/Bloomberg.com Market Data (oil spot price, WTI Cushing, OK); www.goldprice.org (spot gold/silver); Oanda/FX Street (currency exchange rates). All information is based on sources deemed reliable, but no warranty or guarantee is made as to its accuracy or completeness. Neither the information nor any opinion expressed herein constitutes a solicitation for the purchase or sale of any securities, and should not be relied on as financial advice. Past performance is no guarantee of future results. All investing involves risk, including the potential loss of principal, and there can be no guarantee that any investing strategy will be successful.

The Dow Jones Industrial Average (DJIA) is a price-weighted index composed of 30 widely traded blue-chip U.S. common stocks. The S&P 500 is a market-cap weighted index composed of the common stocks of 500 leading companies in leading industries of the U.S. economy. The NASDAQ Composite Index is a market-value weighted index of all common stocks listed on the NASDAQ stock exchange. The Russell 2000 is a market-cap weighted index composed of 2,000 U.S. small-cap common stocks. The Global Dow is an equally weighted index of 150 widely traded blue-chip common stocks worldwide. Market indices listed are unmanaged and are not available for direct investment.