FYI | Dec 16 2015
By Peter Switzer, Switzer Super Report
Our stock market went from 5,151.6 last week to finish at 5,029.5 — that’s a 122 point loss! But since 2 December we have shed around 236 points or 4.5%. So how come and how worried should we be, especially when the Dow Jones index slumped 309 points over the weekend ahead of a Fed interest rate hike that is supposed to be seen as a plus for the US economy?
The most immediate reason is oil hitting close to a seven-year low but Wall Street didn’t like hearing that a junk bond fund of about $US800 million was pulling the “no withdrawals” option to its bondholders.
This comes as there could be some pre-Fed rate rise anxiety and some smarties could be cashing in on the uncertainty that comes with its much-anticipated decision on December 16.
However, the big news was the oil price sliding a big 10% for the week with US crude now selling for $US35.62 a barrel. A warning from the International Energy Agency that oversupply could get even worse in early 2016 did not help.
Right now we are in the eye of the ‘oil storm’ but a lot of respectable analysts have more positive views on the oil price for next year.
"The precipitous decline in oil may be something (the Fed) pauses on but I suspect they say it's something that will pass," said Bill Stone, chief investment strategist at PNC Asset Management, on CNBC.
Adding to the concerns is this junk bond fund called Third Avenue, which has liquidity issues and is stopping withdrawals, which always spooks investors. There has been talk of a bond market blow up for years when rates rise and as we get closer to the Fed’s first rate hike the jumpy types are growing in numbers.
There is also another story out there that some market-influential institutions are selling stocks off as the price of oil falls because they are linking it to possible defaults in the high yield corporate bond market. This is possible and because it’s a possibility and it’s a negative one at that, it has been driving some of this recent selling.
Of course, China’s growth has not helped and there have been record outflows of capital as the yuan depreciates and all of the above explain why the VIX or fear index went to 25 on Friday on Wall Street.
There is also a concern that if the Fed raises its official interest rate on Thursday, then emerging economies’ currencies could be smashed. Other experts discount this scenario, in fact arguing that a lower currency is exactly what these economies need.
What you can see is that there is a mish-mash of potentially scary issues that might all work out OK, but on the other hand, could rattle stock markets.
I know these unknowns are all unsettling but there are some “known knowns” as Donald Rumsfeld might have put it. That should underpin an eventual turnaround of sentiment and stock prices. Let me explain my point by informing you that the former basket case economy called Ireland is being tipped to be the ‘Celtic Tiger’ again with growth forecasts out there of, wait for it, 6%!
This should brighten up Gerry Harvey who made his move on Irish retail just ahead of the GFC and he has admitted to me it was not one of his best decisions. That said, he has been making headway with Irish shoppers recently.
I love the story as it’s a kick in the pants for those who discredited bailouts when the GFC crippled countries such as Ireland and gave birth to the economic basket case group called PIIGS — Portugal, Italy, Ireland, Greece and Spain.
Big corporations are again beating on the door to set up in Ireland — a great tax rate will do that — but the appeal of a well-educated workforce also is attractive. Of course with growth rates of 6% some experts are saying “here we go again” with a boom and bust story in the making but there still is no building boom, which was the Achilles of heel of the pre-GFC Emerald Isle.
As you can see above there are a lot of headwinds for stocks but the real big blower comes with the Fed decision on Wednesday in the USA. We should see on Thursday if it’s a gale force headwind or a surging tailwind for stocks.
As you can see I have focused on the bad news out there — not easy for someone like me — but still the sell-off has not been crazy.
Technically speaking we have had a triple bottom on a rising trend and this can be a omen that a downtrend is close to ending.
Also the economic stories of the USA, UK and Europe have been better than expected. Japan has been horrible with two recessions in 18 months but the outlook is surprisingly better than you would expect and our own story here has been terrific with the
“Biggest back to back job gains in 28 years” as CommSec put it with 127,500 jobs created over October and November in two months.
Throw in the fact that the world of stocks has ignored that this oil price fall is one of the greatest tax cuts for the consumers and businesses right around the planet and surprisingly it has been ignored by those driving stock prices. One day that penny will drop.
You know if we say look at the price of oil and imagine it had risen from its 2015 starting date of $US50 to say $US100 a barrel instead of falling to $US35, there’d be experts tipping inflation and then recession, especially if the guess was that it could rise to $US200, which one Goldman Sachs expert tipped a few years back!
Our best protection from this wide array of bad news will be strong economic data over 2016, a low oil price, worldwide low interest rates and QE. These are our best bets and let me add, don’t give up on central banks just yet. They still have some clout and they’re after growth. As Mario Draghi of the ECB puts it — “whatever it takes.”
By the way, while you were enjoying your weekend the Chinese released some key monthly data with retail sales up 11.2% in November, which just beat forecasts. Industrial production rose 6.2% against expectations of a 5.6% rise and that was fastest growth in five months! Urban investment was up 10.2% and also just beat expert guesses.
It might be premature to give up on China too and we all might be ignoring what a future fast-growing India might mean to companies such as BHP and Rio down the track.
It’s a huge week ahead with the Fed meeting and Janet Yellen dons the red suit and brings that damn, overdue Santa Claus rally!
Peter Switzer is the founder and publisher of the Switzer Super Report, a newsletter and website that offers advice, information and education to help you grow your DIY super.
Content included in this article is not by association the view of FNArena (see our disclaimer).
Important information: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.
Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" – Warning this story contains unashamedly positive feedback on the service provided.
