Feb 09 2016
February 9, 2016

A Bumpy Ride

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Now we can say we’ve lived through one of the worst investing years (2015) and the worst start ever to a new year.  Congratulations!

2015 finished with every asset group in the negative.  The only index to finish the year in the green was the NASDAQ.  The diversified portfolio had no upside.  The reasons being given for the negative returns last year are numerous and have continued being a problem this year.  As I write this commentary the majority of stocks in the S&P are down over 20%.

Low prices at the gas pump are fun but they’ve been a headache for the stock market.  Energy companies are taking a hard hit in market valuation and dragging down other groups, such as the financials, with them.  The jobs being lost in the energy sector are typically higher paying positions.   Unemployment has dropped to 5% but most of the jobs have been low paying positions and the already employed have had little in the way of real wage growth.  The discount at the gas pump has for many been the biggest income hike.

The FED’s .25% rate hike last year became a true hurdle for the markets.  The increase was insignificant but put Wall Street on notice that the flow of free money had been cut off.  The FED reduced its rate to zero 8 years ago in an effort to juice the overall economy.  The true result was an inflated stock market value.  Low interest rates caused investors who would normally live on income from safe investments such as CDs to invest in riskier investments and thus inflate stock values.  Companies holding large cash positions used their money to buy back their own stock, which inflated stock values.  Members of the FED are sticking by their earlier announced plans to increase rates 4 times this year.  Poorly timed rate hikes could push the U.S. economy into a recession.

The rest of the globe is already in recession.  While the U.S. is hiking rates and pumping up the value of the dollar, other central banks are devaluing their currencies and initiating one quantitative easing strategy after another.  The country being most closely watched by the U.S. market and the rest of the world is China.  The world’s second largest economy is reporting a declining GDP.  Added to the equation is concern over just how honest the Chinese government is in revealing the true strength of their economy.  What is known is that the Chinese insatiable appetite for commodities from around the globe has taken a break.  That has thrown commodity based economies into a lurch.  While the U.S. is not a big exporter to China, we are to much of the rest of the world.  The strengthening dollar has made it more difficult for U.S. exporters to  sell into economies that are in a deflationary cycle.  The products being imported are becoming cheaper and cheaper meaning we are importing deflation.

Expect the markets to continue the bumpy ride.  Market projections for 2016 are all over the map.  Here at Oak Springs we are entering 2016 with a large cash position to ride out the turbulence.  We will continue to look for opportunity where it presents itself.  Sadly, no one will ring a bell to signal a market bottom but as we see trends develop we will begin buying back in.