Although the temptation this month was to take on the subject dominating the news, the 2016 presidential election, I decided that anything I could add to that discussion would be pure speculation and of questionable benefit to our readers. I'll leave that debate to the pundits and prognosticators. For the latest discussion from an investor's perspective, I would refer you to this week's cover story in Barron's ... it has an interesting conclusion.
Thus far in 2016, the markets have tried to please (and frustrate) all investors, both the bulls and the bears. January was a winner for the bears who were positioned for a recession, as we saw an 11% market decline followed by a strong rally to end the month down only 5.1%. February repeated the roller coaster with another dip down to the January lows, followed by a rally back to where we started, ending the month down 5.5% for the year.
Volumes have been written and discussed about how this January-February action has played out over the years and whether the presidential election cycle will affect the markets, but again I will leave that discussion to the pundits and prognosticators ... I find no clear pattern that gives me any comfort (or discomfort for that matter) from all these gyrations.
Asking the Right Questions
After much reflection, my conclusion is that we need to be asking different questions in order to make intelligent investment decisions in these uncertain times. If possible, we need to ignore as much of the "noise" about the election and focus on the factors that actually affect the earnings of the companies we choose to invest in. Here are several questions I believe are important for us to focus on here:
OIL & INDUSTRIAL METALS PRICES GOING UP OR DOWN? Will commodity prices continue to be weak or even fall further? Our opinion is that prices will continue to be under pressure and that this will affect several other important issues. Until demand for oil and industrial metals outpaces the astounding production being generated by the U.S. Energy Renaissance and the worldwide commodity production, boom prices will be under relentless pressure.
INFLATION OR DEFLATION? As long as we have (1) bountiful supplies of oil and industrial metals and (2) global competition for almost every product you can imagine, it will be very difficult for the Fed -- or any other force -- to produce inflation. There is a global oversupply of labor that will quickly fill any need that we have. With no pressure from commodity prices or from labor for widespread wage increases, inflation will probably not be a problem in the foreseeable future.
RISING OR FALLING INTEREST RATES? With interest rates at levels most of us have never seen, it is easy to ignore the possibility that rates might actually fall. Without inflation, or even with the threat of deflation, interest rates may be low for years to come, and possibly go lower. Recent moves in Japan and Europe to use negative interest rates have begun a very different conversation about monetary policy around the world ... watch to see how this develops.
FED POLICY REMAINING FOR 2016? If the Fed continues to push interest rates higher this year, we may be in for more market volatility. Higher rates with no inflation make no sense and could, among other things, push our economy into a recession. Higher rates also tend to create a stronger dollar, which not only dampens demand for products produced in the U.S. but could create currency issues for our trading partners. China is currently under pressure to devalue its currency and estimates are that China is using $100 billion a month of foreign reserves to prop up the yuan ... usually a problem with a bad outcome.
LOW OIL PRICES AND THE BANKS? Fifty-three oil and gas companies filed for bankruptcy in the Q4 2015. Brazil, Nigeria, Russia and Venezuela are in danger of default. Low oil prices are creating incredible stress on all the companies and countries that benefitted from high prices for years. Expect to see an explosion of defaults this year that might come back to bite the banks and financial institutions that provided capital to these entities, depending on the severity of the price cuts.
WILL CONSUMER SPENDING IN THE U.S. SAVE US? So far, the U.S. consumer has come through and seems to be spending enough on new cars, houses and other big ticket items to more than balance the scales in favor of U.S. growth, so all is not doom and gloom. If the Fed does not derail the economy with interest rate increases, or low oil and commodity prices do not create a crisis in the financial world (particularly the European Banks), our markets could actually have a good year... supported by old fashioned consumer spending!
There are numerous questions we could and should be asking as we navigate these incredibly complex markets. We believe that it is wise to focus on investments that will generate income and will be most likely be the "safe havens" that investors flock to when they panic in the face of a volatile market. It worked pretty well in January and February. We believe it will continue to work for us.
We wish we could be more optimistic, but we believe in painting a realistic picture to our clients, and we still believe high caution is warranted. As we always like to remind you, we are here to provide you with everything you need to plan for your financial future. Please call us if you need a pep talk. 2016 will likely be interesting.
The information contained in this report does not purport to be a complete description of the securities, markets or developments referred to in this material, is not a complete summary or statement of all available data necessary for making an investment decision, and does not constitute a recommendation. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any opinions are those of Dave Crouch and Cherie Hammond and not necessarily those of RJFS or Raymond James. Expressions of opinion are as of this date and are subject to change without notice.