January 20, 2016
The pile on has begun, or more accurately, continues. Each morning we are greeted by “oil hits new lows” plastered all over CNBC. At some point, a major oil producer will cry “Uncle,” lower their production, and oil will stop its freefall. When that will happen, we don’t know, but it will.
Since the March 2009 market lows to the May 2015 all-time highs the Dow Jones Industrials Average, “The Dow” went from 6,500 to 18,270. That is almost a triple in a little over six years. Over that time span, the Dow’s average annual return was 15.37%, S&P 500 was 17.32%, Dow Jones Wilshire 5000 was 17.84% and the NASDAQ was 21.56%. Those annualized returns are well above the 8%-12% annual returns one can expect from investing in equities. So the current market activity should not come as a huge surprise, yet it always does. The current pullback/correction is a regression to mean returns.
With the equity markets in correction territory down over 10% from highs, talk is of a bear market, 20% declines from recent highs. If you own shares in any commodity, airline, biotech, to name a few sectors, you are already experiencing a bear market. The major indices have been held up by the likes of the Facebook, Netflix and Amazons of the world.
Many investors blame the Federal Reserve’s December 1/4 point increase in short term interest rates for the recent selloff. Raising interest rates by 25 basis points should not have much of an effect as long as the U.S. economy is strong. Interest rates are lower now than when the Fed raised rates in December. Many stock dividends yield more than the 10-year Treasury, currently 1.96%.
In addition to The Fed’s decision to raise rates, other external forces weighing on the equity markets are: China’s economic growth, oil’s decline, and the continuing tensions/conflicts in the Middle East. China’s economy was bound to slow down, no surprise there. Oil is currently trading around $27 a barrel and analysts are calling for $20 or less now. Current market sentiment for oil is opposite of 2008 when oil was at $140 a barrel and Goldman Sachs predicted oil would hit $150 to $200 a barrel, and other Wall Street firms were making similar calls. As for the Middle East, there have been conflicts and tensions going on there long before the pilgrims landed in America.
There’s an old Wall Street adage that the stock market takes stairs on the way up and an elevator on the way down. Sure feels like an express elevator! Markets like these are why we have always liked to have cash in accounts. It’s hard to look at that cash as the market rises but it’s nice having some when market prices for companies decouple from the underlying asset values of those same companies.
As always, if you have any questions, we are available for you here at Hayes Asset Management.