January welcomed investors with the worst annual start since 2009. The S&P 500 finished the month down 5.07%, the Dow declined 5.50%, and NASDAQ dropped 7.86%.
As of the end of January, 40% of S&P 500 companies have reported fourth quarter earnings, with 72% reported earnings above the mean estimate and 50% of sales above the mean estimate.
So far, the blended earnings decline is -5.8%; if the Q4 reports earnings decline again for Q4, it would have been the first time since 2009 that the index reported three consecutive quarters of year-over-year earnings decline.
Profit Recession
Some 39 companies have issued earnings-per-share (EPS) guidance for Q1 2016, 33 of which have issued negative EPS guidance with only 6 with positive EPS guidance for the first quarter of 2016.
So far, earnings reports have been mixed, with some mega-cap companies missing expectations, such as Apple (AAPL), Electronic Arts (EA), and Amazon (AMZN), and others beating expectations, such as Facebook (FB), Alphabet (GOOG), and Microsoft (MSFT).
Oil Swings
Oil was a major mover in the markets in January, plunging down to a low of 26.19 on January 20, 2016 and throughout the entire month, bouncing up and down in the high 20’s to low 30’s range.
With each major move in oil price, the Dow saw wild triple digit swings intraday as well, causing much of the volatility in January.
As expected, the Fed did not raise interest rates at their first meeting of the year on January 27, 2016 due to the market turmoil and allowing more time to weigh the economic effects of its first increase.
Fed Uncertainty
Interestingly, on February 1st, Fed Vice Chairman Stanley Fischer, typically a hawkish member of the Fed, commented that the bank was unsure of its next move as global outlook concerns had been mounting and inflation was continually missing expectations.
That caused more traders to bet that the Fed may not raise interest rates as much as they had originally planned this year.
The Bank of Japan recently surprised financial markets worldwide by moving to negative interest rates for the first time ever in a desperate attempt to induce growth in their sluggish economy.
China Slowdown
China’s manufacturing PMI decreased to 49.4 in January from 49.7 in December, marking the sixth month of contraction in manufacturing.
However, the decrease in manufacturing is to be expected as global demand has been weakening, the government aims to reduce pollution, and China is intentionally shifting to a consumer and services driven economy.
China’s services PMI, which came in at 53.5 in January, is still expanding and well above the 50-point level between expansion and contraction.
Market Volatility
In the near term, we expect to see further volatility in the Chinese stock market as China goes through the growing pains of shifting to a consumer and services economy and the subsequent ripple effects throughout the global economy.
Nevertheless, despite its slowdown, China still remains one of the fastest growing economies in the world and a major player in the global marketplace.
Major international corporations around the world have their eyes set on the Chinese consumer, as China is expected to have more than 630 million middle class Chinese by 2022, almost double the entire population of the United States.
Commodities
The commodities market remains depressed. Oil prices plunged 9.21% in January as supply continues to outstrip demand and as China, the world’s largest energy consumer, continues to reduce its manufacturing sector.
Natural gas prices also dropped -5.26% in the month of January as production and storage inventories have hit record levels and temperatures have been and are forecasted to be much warmer than normal.
Gold prices have continued to rise and finished the month of January up 5.29% as investors seek a safe haven amidst the equity market volatility and as China’s manufacturing has continued to contract.
Mighty Dollar
The U.S. dollar remains strong at 99.65, rising 0.91% in January amidst weakness in Asia and Europe.
The 10-year treasury yield tanked 14.81% in January, as investors continued to buy the bond as a safe haven against the tumultuous market, which raised its price and lowered its yield.
Outlook
Our outlook for 2016 remains bearish as the global economy continues to slow, oil prices struggle to rise above the low to mid-30’s, and U.S. mega-cap companies have been reporting mixed earnings, many with lowered or conservative guidance.
Many factors could set off the market into bear territory. Performance reports and forecasts that are below expectations for the remainder of the mega cap firms could accelerate a further sell-off in the market.
Aging Bull
The stock market has been on a bull run for nearly seven years and is due for a correction. We believe we could easily see a correction of 15% or more this year and are vigilantly watching the markets seeking to protect our clients’ portfolios against the downside.
We have already heavily reduced exposure in our portfolios and will consider going into the inverse of the market if fundamentals continue to deteriorate.
Photo Credit: sabin paul croce via Flickr Creative Commons
