Long term investors have a broad view of the market, traders’ view of the market is shaped by a sliver of information, and never the twain shall meet. The market of late has been at the mercy of the news/gossip regarding oil, much like a high school boy/girl who is about to ask someone to the Junior Prom. Today, the discussion was whether OPEC would limit production, which explains the movement of oil up; however, we have since learned that Saudi Arabia did not propose a 5 percent oil production cut.
The focus of oil is a small part of what everyone should really be focused on; the focus should be on the growth or lack thereof from the economies of the world. Apple announced earnings and the outlook wasn’t very rosy which Dan Niles outlined. Apple’s lack of growth in China really shouldn’t be a surprise to anyone given how its outlook for GDP has been lowered, the revaluation of the Yuan, and the construction tidal wave of the past handful of years has turned into more of an ankle buster/snapper. The U.S. economy is still chugging along but I don’t see companies reporting strong earnings or having a really favorable outlook for the next few quarters as the world’s economies slow down.
A friend recently told me that an economist had told him that the market was underperforming based on the economist’s expectations. I totally disagree, I believe the Dow Jones Industrial Average’s fall was to be expected, thus, it is the economist and all the others who believed the market would keep humming along that had inflated expectations.
If you bought shares indexed to the Dow Jones Industrial Average on August 31, 2015 when the low was 15,979.95, you probably thought that you were too big for your britches when on November 2, 2015 it had an intraday high of 17,977.85, a gain of 12.5%. As of 10:45 am on January 20, 2016, the market has almost reached where I had expected it -on August, 25, 2016 – to close on August 30, 2016: 15,386.82. I know, I was off a handful of months, but I didn’t waiver in that the DJIA was going to impersonate a falling rock.
Now, I’m sure you are thinking, where do I think the market will go from here? Well, for a small fee I’ll tell you- I am kidding; OK, for an employment opportunity. I’ll modify what Reggie Jackson use to say about his role with the New York Yankees and apply it to China: China is the straw that stirs the economy. Yes, oil’s drop is also a contributing factor as Saudi Arabia continues to pump oil disregarding the drop in prices, even when Iran’s production will further glut the market. The drop in commodity prices, excluding oil, has also contributed to this economic meltdown. Drum roll please, I still believe the market will drop some more. I would also like to discuss my views on individual stocks, but I don’t have the requisite time. After all, this is just a blog, and not a financial newsletter-for now.
It is said that when China sneezes, the U.S. gets a cold. Well, China has not been feeling well for a while, and their recent devaluation of the Yuan to begin 2016 -Happy New Year! -was worse than the hangover that many of the revelers felt on New Year’s Day. Now, China alone is not entirely to blame for Main and Wall Streets’ woes, but it is a major contributor.
Hindsight is 20/20, but people really shouldn’t be surprised by what has happened given how Main Street’s lack of enthusiasm for the future was disconnected from how Wall Street viewed it. About 2/3 of the U.S. economy is dependent upon consumer spending, and although employment is up, many of those jobs are not the high paying manufacturing jobs that once signaled the turnaround of the economy, but rather in , according to the Employment report on January 8th, 2016, “professional and business services, construction, health care, and food services and drinking places.” The declining oil prices have put a huge damper on that industry as companies seek to reduce costs through the reduction in production, which translates into fewer jobs. Also, wages have been stagnant with average hourly earnings failing to break 2.5% on a year over year basis. Furthermore, housing, in particular rents, have increased to the point that they take up a lion’s share of one’s paycheck. Ouch! Lastly, yes, finally, credit card debt is still a problem for many as that is used as a buffer or to augment the lack of wage increase and rising rents. The good news is that falling oil prices have resulted in lower gas prices, but, that savings is being pocketed to help make up for stagnant wage growth. Oh, the last bit of bad news is that health care spending is up due to the rise in premiums.
I still think the U.S. stock market, at the time of this report the DJIA was at 15,982.26 (down 396.79 or 2.42%) from the prior day’s closing, has further to drop. I tweeted on August 25, 2015 that I believed the market would close at 15,386.82 for that week. So, my timing was off, but my underlining assumptions weren’t; it has taken some stiff coffee for everyone to wake up. It has been my business experience that a poor quarter is viewed as a hiccup and that businessmen/women are often too slow to realize when it is something more; nothing wrong with being an optimist, but you have to temper it with some reality.