Global Reordering Continues

Fox Business Update Fears Flare

The headlines we have all been reading thus far in 2016 and a large majority of the themes I have outlined in our morning note are not only a source of concern for investors, they have once again driven a palpable sense of fear back into the market – a fear reminiscent of the atmosphere that overtook Wall Street as recently as August of 2015. The subsequent move lower in US equity prices that month was the most extreme in years. Ultimately markets recovered in September and October but not enough to deliver anything more than modestly negative equity performances for the year.

In many respects the headlines this year have really not substantively changed from last year; crude’s collapse, global crude glut, China’s slowing expansion, Chinese equity market volatility, the devaluation of China’s yuan, simmering tensions in the Middle East and concern over our own economic vitality all top the litany. About the only theme no longer top of mind for investors as we attempt to manage our way through the first full week of trading are questions about the Federal Reserve’s first move on rates since before the Great Recession. Additionally, the only item on this year’s list of concerns that was not present last year was the unconfirmed news of North Korea’s hydrogen bomb test. Otherwise, all of these themes have played a pivotal role in the volatility and price action that has come to define much of the past six months.

Tuesday’s anemic pause in equity markets was rudely interrupted in the overnight before Wednesday’s opening with news of China’s move to devalue the yuan. Naturally, given the last time this occurred, markets flinched and lost ground. All three majors picked up where they left off on Monday. The Dow Industrials (-1.47%), S&P 500 (-1.31%) and NASDAQ (-1.14%) spend the entire session in negative territory. To once again underscore institutional conviction, volume on both the NYSE (+11.92%) and NASDAQ rose (+11.62) meaningfully. In the process markets registered yet another distribution day, moved yet further below their 50 DMA and 200 DMA averages and remain hobbled.

As gloomy as the landscape appears at the moment, and it certainly is that, I remain constructive on markets in the longer term. In fact, more constructive than I have been in months. My optimism rests on two pillars; domestic economic data and the prospects for better than expected corporate earnings. As you know from my annual piece penned on New Year’s Eve, I expect a roughly 6% gain in equity markets, as measured by the S&P 500, this year. I also expected an 8% increase in corporate revenues. Furthermore, consensus estimates for 2016 GDP range from 2.2% – 3.1%.

On a more granular level, the December ADP report released (+257k) yesterday proved to be the best monthly report of its kind for all of 2015 and handsomely beat consensus expectations that were calling for 190k. More broadly, the official unemployment rate last month was 5.0% down from 5.8% a year earlier. Additionally and in spite of a stronger US dollar, the Trade Balance level for November, released yesterday, came in at $-42.4B versus expectations calling for $-44.4B. Factory orders matched expectations of -0.2%. Though flat, clearly not in a state of significant contraction. We even received some positive, though slightly mixed news from the weekly EIA Petroleum Status Report. Crude oil inventories dropped by 5.1 M barrels for the week versus expectations that were calling for a rise of 2.6 M barrels. That relatively good news was overshadowed by a dramatic rise in both gasoline inventories (+10.6 M barrels) and distillates (+6.3 M barrels). All in all, the economic landscape and projected corporate earnings do not appear to be projecting a major contraction at the moment.

Even normally dovish Federal Reserve Vice-Chair Stanley Fisher indicated yesterday that the economy is expanding at a sustainable rate and that there is the potential for as many as four interest rate hikes this year. That does not speak to contraction. Rather the landscape, as measured by the Federal Reserve, appears to be one of expansion coupled with modest inflationary pressure.

My longer term (one year) constructive outlook for equities however, does remain mired in a sense that our recent volatility will become a fixture in 2016 and that we have not yet reached our near term lows. A proper correction (-10% or more) is in the cards, China and oil will continue to dominate the equity trade for the next six months and investors need to be very wary of the geopolitical themes that have upended any attempt at a rally thus far in 2016. Our eventual climb to positive performance for the year will take time. Time and patience.

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flickr photo: **RCB**