In an article penned for MarketWatch.com, columnist Howard Gold provided one of the truest statements regarding investment mentality ever put to paper; “When investors want to buy stocks, they ignore bad news. When they want to sell, they tune out good news.” We have written numerous times that equities are overbought (based off of historical PE ratios) and that current valuations have been the result of stock buyback programs and escalating interest in the technology sector. There are some very real global matters that investors need to be cognizant of.
The Federal Reserve lowered rates following the 2008 catastrophe in an effort to encourage borrowing and strengthen the economy. The only problem is that this recovery has been one of the weakest on record, and interest rates cannot move any lower. This is the definition of a liquidity trap; when rates are lowered to loosen access to credit and therefore increase economic activity, but the lower rates have little to no impact. Not only can the Fed not lower rates any more, but there are severe doubts about how long rates can be held at these levels (which have been decimating the earning power of seniors looking for fixed income investments), and how equities will react when rates begin to rise.
The ISM Manufacturing Index and Factory Orders both showed signs of slowing from their previous reports. There are several factors that are holding back economic growth at the moment, but the point is that without significant recovery in these sectors our economy will not truly be back to healthy levels. This global decline is verified by the sharp drop in the Baltic Dry Index, which shows the price of moving raw materials by sea, and just hit its lowest value since 1986. Providing products to global consumers is the key to a successful economy. Providing services can certainly be beneficial, but cannot support an entire nation. Ask Greece about their tourist economy and how that is working out for them.
Oil Prices and Exports
The tumble in oil prices has been a blessing for consumers who saw their gas prices halved since summer of 2014, however it has been devastating to energy producing nations (Russia) and to energy companies. We do not believe that oil has hit bottom just yet, but we are watching carefully to see what investment opportunities this decline might present, as well as how market participants respond.
The United States Dollar (USD) has been on a rally of epic proportions since 2011, with the $DXY index rising nearly 30%. Our contention is that the dollar is not necessarily strong at the moment, but it has comparative strength to other global currencies. The Ruble has suffered immensely over the last 8 months, the Euro took a shock after Switzerland removed the Franc’s peg, and the Japanese Yen seems bound and determined on devaluing as much as they can. That does not make the Dollar strong, just not as weak as the others. The strong comparative value of the Dollar will have negative impacts on exports, which will likely throw our balance of trade out of whack and could have far reaching implications as well.
All of the data that following are showing signs of increased volatility, new highs/lows that have not been seen in decades for some indicators, and at times the market seems to react exactly the opposite to how one would expect. We are not saying that the time has come to jump ship from equities, however we suggest that investors remain cautious and diligent moving forward.