NEWSLETTER – JANUARY 2016
January 5, 2016
The year 2015 is now in the books and the weather has been arguably more memorable and exciting than the stock market. While the summer was abnormally long and dry and winter so far has been anything but wintry, the domestic stock markets have been relatively uninteresting. To wit, both the Dow Jones Industrial average and the S&P 500 index finished the year within a percent or two of flat. The NASDAQ Composite index fared a little better gaining over 6%, driven mainly by the major technology companies. World economic growth has been somewhat disappointing which limits the ability of U.S. corporations to produce earnings growth as most corporations garner a good percentage of their sales from overseas. Additionally, the U.S. dollar continues to be strong relative to the Japanese Yen and the Euro which puts additional pressure on corporate earnings as discussed in the GSB Wealth Management September newsletter. These trends have been in place for some time now and show no signs of abating. As such it will be difficult for the stock market to make much headway as stocks have witnessed strong gains off of the 2009 lows and appear fully valued based on the earnings per share estimates we are looking at for 2016.
We also talked about “weakening internal dynamics” of domestic stock markets in September and how a handful of the largest tech stocks were driving the market. This trend continues as we speak. Perusing the NYSE new highs and new lows list in the newspaper shows that many more stocks have been hitting 52 week lows as opposed to stocks hitting 52 week highs, an unnerving situation given that the stock market is within a few percentage points of highs hit last summer. As of December 28, 30% of the stocks in the S&P 500 are in what is considered bear market territory, or down 20% or more from their respective highs. All of this data is useful in that in past market cycles, what has been discussed above typically precedes some sort of market setback, correction (a drop of 10% from recent highs) or worse. On the positive side of the ledger, there is not a lot of competition for stocks from other asset classes. Interest rates continue to be historically low, despite the Federal Reserve Bank’s intention to push short term rates up over the next months. World economic growth and inflation expectations do not support a scenario of significantly higher interest rates. We may well see the Federal Reserve slowly increase short term rates up to 1% in 2016, while longer term rates (10 and 30 year Treasury bond) stay in the 2% and 3% range, respectively. If such is the case, money market funds and bank CD’s will still offer paltry returns in the 1% range (albeit better than zero) and longer term debt instruments may well offer rates about where they are right now. This is hardly exciting when high quality stocks pay dividend streams of over 3% that grow year over year. Gold peaked in 2011 and has been in a down trend ever since. Commodities have generally been in a downtrend due to the weak international economy, mainly China. Real estate, like stocks, has recovered strongly in the past several years so may not perform as well going forward. So the question becomes- if you sell your stocks, where else do you go to generate attractive returns?
One trend that is very exciting for the future of the U.S. is the ability of our country to move more toward energy self-sufficiency. Technology has advanced rapidly in the drilling space allowing oil and gas producers to draw more and more energy out of the ground at ever lower prices. The impact has been a drop in the price of a barrel of crude oil from over $100 to less than $40 in one short year. The price of a gallon of gas at the pump has fallen from $4.00 to $1.95, putting more discretionary income in consumer’s pockets at a time when wage growth is barely keeping up with inflation. The ramifications of this are manifold. First, the American consumer has significant funds freed up from money saved at the pump and on gas and oil needed to heat the home. Assuming the average person drives 15,000 miles per year and their car averages 25 MPG the annual savings is around $1,200. Assume the same consumer buys 750 gallons of heating oil per year the savings amount to another $1,500. The combined savings is a good percentage of the average U.S. household income and can be used to bolster household savings and/or add to consumer spending. Furthermore, most feel that it would be comforting to know that the U.S. could supply most of its own energy needs without relying on foreign countries to bridge the gap, some friend and some foe. OPEC has made clear that they will not be cutting production to balance the market as they have in the past. Many OPEC countries have large budget deficits and have pledged to keep pumping as much oil as possible no matter the price. This is a sea change and could keep the price of energy low for quite some time.
Regarding the past few months GSB Wealth Management has raised cash in several instances and has not redeployed given the issues discussed above. Should the market continue in its volatile state and perhaps move lower over the next few months, we believe it is prudent to have some cash on hand to take advantage of opportunities as they may present themselves.
Unless stated otherwise, any mention of specific securities or investments is for hypothetical and illustrative purposes only. Adviser's clients may or may not hold the securities discussed in their portfolios. Adviser makes no representations that any of the securities discussed have been or will be profitable.