Stocks hit the reverse button last week as markets fell across the board, the SPY fell 2.22%, QQQ fell 2.77%, VTI fell 2.17% (dividend adjusted), VT dropped 1.64% (dividend adjusted) and the AGG fell 1.17%.
We wrote two weeks ago when the market was down about 3% that there wasn’t much fear in the market and there might be more to go. The Fed’s deft handling of the word “patient” last week in its guidance pushed the market up, but that might have been a temporary advance as we were negative on 4 of 5 days this week. The market could be in stall mode until earnings season begins in a couple of weeks.
There were multiple culprits to put the blame on. The US durable goods report was a big disappointment, falling 1.4% in February, pressuring domestic based small cap companies. The Chicago Fed National Activity Index was also down. Biotechs, which have been on a tear reminiscent of tech stocks in 99/00, fell 5%. Investors are worried about repeat of last year when biotechs fell 20% after getting out to a strong start. Oil prices jumped 7% after Saudia Arabia led air strikes against rebels in Yemen. There were, however, two good reports, new home sales had a big beat over expectations and jobless claims fell to 282k.
The market is also worried about the transports. The Dow Transports have had declining highs in 2015. Transports are considered a leading indicator for market performance.
The market has held support in the low 204s two times in the last three weeks. Friday was the one advance of the week as the SPY managed a 0.23% gain.
The market turned in a winning week as the SPY advanced by 2.23%, the overall market as measured by the VTI was up 2.1% and the international markets, x-US, as measured by the VT was up 3.37%. Bonds, as measured by the AGG, were up 0.9%. The WisdomTree Europe Hedged Equity Fund has been in what seems like dozens of articles over the last couple of weeks. This fund invests in Europe but hedges away the currency risk. It has had a banner year and is up 15.68%. I am wondering if its rise from obscurity will slow its increase now that the word is out. HEDG increased 0.4% for the week.
The big news for the week was the Fed removed the word “patient” from it guidance. The market had anticipated that if “patient” was out, then a June rate increase would be in, and that was a big factor in the slight declines over the previous three weeks. But leave it to the Fed to do whatever is necessary not to upset the markets in the slightest. The Fed managed to remove the word “patient” and at the same time, convince everyone that they will be more patient than ever before. Yellen said “because we removed the word ‘patient’ from the statement doesn’t mean we are going to be impatient.”
So now, investors are thinking that June is probably out and that September is probably the in, but maybe the first rate increase won’t be until January! The markets loved it and it sent stocks higher on both Wednesday and Friday to lead the nice increase for the week.
The problem is that the continued suppression of interest rates leads to the misallocation of assets, and pushes financial markets higher than they should be. I have to believe that a very small increase in rates when the economy is relatively strong would be a good thing right now, even if it upsets the markets in the short run. But it looks like we are in delay mode again.
Falling oil prices have held the market back of late. Worries are that if oil prices continue to fall, there will be a major hit to earnings but also a serious threat of defaults in the high yield markets. The market doesn’t want high oil prices, but they also don’t want much lower prices. Probably, a steady price somewhat higher than what we currently have would be ideal.
In any case, the futures markets might be giving us a hint that the bottom in oil is somewhat near. A market is in “contango” when the futures price is greater than the spot price. As the futures contract comes close to ending, the futures price and the spot price have to converge. A market that is in “contango” has traders essentially betting that the spot price will rise, otherwise their speculation will end in a loss.
Per a report provided by Ned Davis Research, the market as measured by the 5-year futures contract over the 91-day perpetual contract is at an extreme. Less than 2008 but on par with 1998. Such an extreme came close to marking the bottom in those years. In 2008, oil fell 79% and in 1998 it fell 59%. Currently, oil is down 60%.
However, buying oil-related stocks based on a bottom in the price is usually best a few months after the bottom is in.
The SPY fell by 0.81% for the week making it three consecutive weeks of losses. The market is 2.9% off its closing high of 211.99 and was 3.5% off that number Wednesday. The VIX closed the week at an even 16.00 and has so far peaked at 16.87. So we really haven’t seen much of a decline and there is no significant fear in this market at that moment, in other words, there may be more to go.
The big story this week is the continued ascent of the US dollar. The strength of the US economy as well as the “towering” yields offered by US treasuries compared to anywhere else in the world have put the USD on straight path north. While the stronger dollar may not have a significant impact on the real US economy, it will have an impact on earnings in the SP500 which have significant exposure to overseas business. Lower possible SP500 earnings is holding the market back, at least for now.
Investors are also waiting on the Fed meeting this week and if the word “patient” will be removed from Fed guidance. That would mean a likely increase in June, instead of September.
The Fed increase is not a done deal and there is still a lot of debate about its merits. Bond King Jeffrey Gundlach in a conference call on March 10 is against it and said it would be a “blockhead” move in light of a fragile US economy as well as negative rates overseas.
Another factor impacting the market is falling oil prices. Oil dropped 10% to $44.84 per barrel.
The SPY was down 1.5% for the week and the market fell for the second straight week to close at $207.50. We are now 2.1% off of the closing high of 211.99 on March 2. The big hit to the downside was on Friday as the SPY was down 1.4% due to a positive jobs report.
Non-farm payroll increased by 295,000, which was 60,000 more than expected. Yes, that is good news but in the world of the stock market good is often bad and bad is often good. The worry is that this might push the Fed to increase interest rates from their artificially low levels sooner rather than later, as in June rather than September.
In a recent blog post Mark Cuban writes that we are in a tech bubble that is worse than 2000. He is not referring to public companies but to the private equity market. The difference is that back in 2000 the companies were public and there was liquidity to the market, today,there is minimal liquidity for many of these investments.
Such public investments include equity crowd funding. Cuban estimates there are about 225,000 “angel” type investors overall.
Cuban writes “I have absolutely no doubt in my mind that most of these individual Angels and crowd funders are currently under water in their investments. Absolutely none. I say most. The percentage could be higher.”
“…the only thing worse than a market with collapsing valuations is a market with no valuations and no liquidity.”
It was the strongest February since 1998 as the SP500 advanced 5.5%, after a weak January (-3.1%). This is the second year in a row that a February advance more than offset a January decline and these are the only two times it has happened since 1950.
The market was helped by oil prices stabilizing, and concerns lessened that Greece would default. The anticipated increase in interest rates appears to be delayed now until September at the earliest.
Here are some out of the ordinary ETFs that might be a good measure of what is going on in the economy:
FLAT – if the yield curve is flattening
STPP – if the yield curve is steepening
CEW – emerging market currency fund
CCX – commodity currency fund
CPER – copper
STPZ – less than 5-year TIPS fund
LTPZ – 15 year plus TIPS fund
TTFS and PKW – buyback funds.