February 1, 2016
If January left you with the impression that the stock market appears to be running on fumes, you’re in good company. To say it’s running out of gas, however, would be a mistake. The massive oversupply of oil was the primary focus of global markets last month and led to exceptionally high volatility in most every asset class.
As crude prices plummeted close to $26 per barrel, so did investors’ confidence in the global economy. A flight to quality ensued that sent annual yields on the 10-year Treasury Bond back below 2% and left all but the most defensive equities in the red.
For the month, seven of the 10 sectors in the S&P 500 were negative. Materials (-10.6%) and Financials (-8.9%) fell the most. The typically defensive Telecom (+6.8%) and Utilities (+4.9%) sectors were by far the best performers. Since those companies tend to pay the largest dividends and be most sensitive to interest-rate movements, they benefited most from the pullback in bond yields.
How bad was January for stocks? The S&P 500 experienced its worst ever stretch to start a calendar year, falling 6% in the first five trading days of 2016. The Dow Jones Industrial Average fell more than 1,000 points (6.2%) over the same period. Most of the selling was spurred by a double-digit selloff in Chinese equities stemming from poor manufacturing/factory data. Chinese regulators, fearful that a newly installed “circuit breaker” was contributing to investor panic, actually eliminated a policy that had caused the Shanghai stock exchange to close early in prior days.
Making matters worse for stock prices was the decision by the Chinese government to further devalue its yuan currency, which in January traded at 5-year lows versus the US dollar. As you probably know by now, a stronger dollar represents a headwind for US multinational corporations (including many S&P 500 companies) that earn significant revenue overseas. At one point on Jan. 20, the Dow and S&P had both fallen more than 11% in only 11 trading days since year-end.
This spike in volatility coincided with a rapid collapse in oil prices, which fell nearly 30% over the same brief period. In China, the pain was even worse. Chinese equities (as represented by the Hang Seng Index) were down nearly 20% year-to-date and had fallen 45% from their peak in June 2015.
Fortunately, the news began to improve from there. On Jan. 21, European Central Bank President Mario Draghi kept European interest rates unchanged and indicated further stimulus was likely following the ECB’s next meeting in March. The same day, head of the International Monetary Fund Christine Lagarde referred to global economic challenges as “manageable” so long as central banks around the world make it a priority to coordinate their policies. Those comments were directed at Federal Reserve Chairwoman Janet Yellen and meant as a word of caution that the Fed need not raise US interest rates too quickly following its initial hike in December.
Investors have without question become hyper-sensitive to any action or inaction by central banks. US stocks, for example, experienced a sharp selloff on Jan. 27 when the official Fed comments did not eliminate the possibility of a second rate hike in March. Cautiously optimistic investors were suddenly reconsidering worst-case scenarios, even though we consider a March increase extremely unlikely.
Yellen confirmed the Fed is “closely monitoring global economic and financial developments.” The market took that as bad news (in the sense the Fed is concerned about the global economy), but we consider it further evidence the Fed is unlikely to raise rates again as long as the current weakness persists. In other words, lower rates and supportive Fed policy for longer than initially expected.
The Bank of Japan went a step further on Jan. 29, establishing negative interest rates for Japanese banks in a clearly stimulative move that sent global equities higher. More stimulus, it would seem, appears universally welcomed once again following a year in which the US economy grew at only 2.4%. That’s the same figure it posted in 2014. For the fourth quarter of 2015, growth slowed to an annualized pace of just 0.7%
Earnings season has produced mixed results thus far, but company-specific results in general have taken a backseat to macroeconomic trends. It’s worth noting that many of the high-growth, high-valuation stocks that performed best in 2015 fell the furthest last month. That trend can be seen in the relative performance of the tech-heavy NASDAQ compared to other major indices.
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The content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. Past performance is no guarantee of future results. All indices are unmanaged and may not be invested into directly.
The Dow Jones Industrial Average is comprised of 30 stocks that are major factors in their industries and widely held by individuals and institutional investors.
The Standard & Poor’s 500 Index is a capitalization weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.
The NASDAQ Composite Index measures all NASDAQ domestic and non-U.S. based common stocks listed on The NASDAQ Stock Market. The market value, the last sale price multiplied by total shares outstanding, is calculated throughout the trading day, and is related to the total value of the Index.
The Russell 2000 Index is an unmanaged index generally representative of the 2,000 smallest companies in the Russell Index, which represents approximately 10% of the total market capitalization of the Russell 3000 Index.
The Barclays Aggregate Bond Index represents securities that are SEC-registered, taxable, and dollar denominated. The index covers the U.S. investment-grade fixed rate bond market, with index components for government and corporate securities, mortgage pass-through securities, and asset-backed securities.