The worldwide stock market crash is now three weeks old. Some of us believe that this is no longer a “correction” but that we are now in a bear market. If history repeats, it may be that we will see a much larger down market. How low could stocks go? Earnings season is now underway and the market is hoping for a boost. “Earnings are expected to show the worst decline since the financial crisis, yet analysts are holding out hope that the bar is low, earnings will beat and will help pull the market out of its worst new year slump ever,” according to CNBC Market Insider on January 18, 2016.
According to me, the index to watch is the S&P 500. The closing number to watch for is 2100. When the S&P 500 closes around 2100 or above, that’s probably a good sign that the bull is in the room. If the S&P 500 stays below 2100, that may be an indication that the down market bear is in control. As of this writing about 1:20pm ET, according to CNN Money the S&P 500 was trading at 1900. The year-to-date return (1/1/16-1/22/16) is -7.01%
Thanks to Dent Research, here is our weekly information roundup ending the week on January 15, 2016. We hope this information will help you separate the noise from the news. We start each subject with what you hear in the news and finish with what that information means to you.
Some Oil Prices Go Negative… A Michigan refiner is charging $0.50 per barrel to accept low-grade, heavy sulfur oil from North Dakota.
What it means – Heavy sulfur oil is among the lowest grades out there. Because it is less desirable, it commands a cheaper price, but a negative price? Really? This is one of those old economic jokes where they lose money on every barrel but make it up on volume. Economist Herbert Stein once said: “If something cannot go on forever, it will stop.”
Taking this at face value; oil hasn’t yet reached a point where it cannot drop further because it is still falling. It will stop eventually, but no one knows the bottom price. Every day that oil falls, more energy companies get closer to bankruptcy. It could be an ugly spring.
The Global Equity Rout Continued Until the Central Bankers Showed Up… With very few interruptions, equities fell around the world, making the worst start to a year in history even, well, worse. Markets rebounded late in the week based on hopes for central bank intervention.
What it means – Bad earnings? Sell it. Good earnings? Sell it. Is it nailed down? Rip it up and sell it. Just like previous market manias when bad news was good news and everything was a buy, investment psychology has a singular focus today – get out. It’s as if investors around the world just awoke to crashing junk bonds, aging populations, and the Chinese slowdown.
Then, like a shining light, Mario Draghi appeared on Thursday to let the world know he is very concerned about the current economic state of the world. If things aren’t better by March, he’ll act! The markets were cautiously optimistic about this, but then turned giddy when the Chinese intervened in their currency market again, and the analysts started speculating on what the Bank of Japan will do next week.
The story is getting old. Economies stall; investor’s worry, markets fall, then central bankers print money. That doesn’t fix the failing economies, so the cycle repeats. Eventually, we will have markets that “have fallen and can’t get up,” no matter what the central bankers do.
Inflation Flat in December, Up 0.7% in 2015… Excluding food and energy, inflation rose 2.1% over the past year.
What it means – The modest 0.7% rise hides a lot of craziness. Overall, energy dropped 12.6% for the year, with gasoline down 19.7%. On the flip side, shelter jumped 3.2% and medical services increased 2.9%. Shelter makes up about a quarter of the CPI's weight, so it drags inflation whichever way it goes. That's why the ex-food and energy number is so high.
Yellen & Co. must be thrilled with higher rents, because without that component, inflation was dead on arrival last year, making a mockery of their claim of an improving economy.
Real Wages up 1.6% Last Year… Adjusted for inflation, wages were up less than 2.0% in 2015.
What it means – Stagnant wages are still the order of the day. For years, we’ve heard that falling unemployment will eventually cause labor shortages, pushing up wages. So far, the only thing driving earnings is legislation calling for higher minimum wage in certain locations, which also seems to be driving out businesses.
Modest wage growth holds back the economy in ways beyond the simple view of consumers having less money to spend today. If your income barely moves up over several years, then you will have low expectations for future wage growth, making it harder to justify spending on credit. Low expectations of the future and weak consumer spending are hallmarks of deflation.
Housing Starts Off 2.5% in December, Permits Down 3.9%... The numbers come on the heels of big gains in November, so not a total surprise.
What it means – Single-family housing starts dropped 3.3% last month, while multifamily starts were off 1.0%. Both sectors posted decent, but not stellar, gains for 2015, at 6.1% and 7.0%, respectively.
Walking into the teeth of an economic decline, I don’t see how housing will hold up in the months ahead. If the sector slows down, it will drag down employment, adding to the woes that already exist in the energy sector. The worst part is that construction jobs pay middle-income wages, just like energy jobs. If we lose jobs here, it will be more pressure on the middle class.
European Central Bank Holds Policy Steady… ECB head Mario Draghi announced the central bank will keep its current lending policies and quantitative easing in place, but will re-evaluate in March.
What it means – It means they don’t know what’s going on, they wish they did, they can’t figure out how to fix their problems, and no one on the board has a good idea. So they’ll wait two months and hope for the best! It’s not exactly what you’d want to hear from the people who set monetary policy for the largest trading bloc in the world, but hey, they’re bankers – what do you expect?
The Yen Soared and the Ruble Crumbled… The Japanese yen reached its highest level in more than a year, while the Russian ruble fell to historic lows.
What it means – The yen is a safe haven. I don’t know why. I understand that historically investors and countries wanted to hold a currency in which they could conduct trade, and people bought a lot from Japan. Now it seems like more of an historic pattern than anything else. When the world gets weird, people buy yen. The problem is Japan needs the yen to weaken, not strengthen. Look for the Bank of Japan to weaken the currency to boost trade.
As for the ruble, it’s all about oil. The idiotic policies of Putin (invade, evade, lie, repeat) and his boycott of Western European goods aren’t doing the country any favors, but the ruble’s collapse from 35 per U.S. dollar in late 2014 to 85 per U.S. dollar this week is directly tied to the country’s flagging exports of oil and what it means to their budget. Expect it to get worse.
Chinese GDP Up 6.9% in 2015… This was just shy of the government’s target of 7.0%. Fourth-quarter GDP increased 1.6%, down from 1.8% in the third quarter.
What it means – Whether the Chinese report honest numbers or not doesn’t really matter. Their economy is slowing down, and the world knows it. As China decelerates, the country demands fewer goods from other countries, sending their economic slowdown ricocheting around the world. The worst hit will be commodity-producing countries that are already on the ropes.
Expect the currencies of small, developing nations to drop further, putting pressure on the governments that have borrowed in dollars.
What it means – Sign me up! The slowest part of the web isn’t competing with gamers that suck bandwidth, it’s waiting for all the software on websites that you visit to read your personal data and then decide which ads to place on the page. It’s infuriating.
Brendan Eich realizes that simply blocking all ads doesn’t work since ad dollars pay for most of the Internet. His solution is to allow ads that only know about the browser, so all “Brave” users would see the same ads when they visit a certain website. I don’t know if marketing firms will latch onto this idea, but at least, it’s a step in the right direction. Websites have to earn dollars, but do they have to crush us with unwanted ads about the last thing we searched?
Next Week – The week of January 25 brings reports on the S&P/Case-Shiller Home Price Index, durable goods, new home sales, and the first estimate of U.S. fourth-quarter GDP. We’ll also have the first Fed meeting of 2016. The bankers have telegraphed that there will not be a change in monetary policy at this meeting, so everyone will read the proceeding press release closely for clues about the next meeting.
All the best, John.
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