January 14th Market Commentary

Thursday, January 14, 2016| 1 Comment

Estimated reading time: 12 minute(s)

2016 is off to a very rocky start.  It’s not what anyone expected.  Below is a quick commentary for our Chief Investment Strategist Mark Sorensen.  Mr. Sorensen shares his insights on what has  recently happened in the markets and what we can expect in the short and intermediate future, as seen through his eyes.  This is an important read that will take less than 5 minutes of your time.

Market review by Mark Sorensen Chief Investment Strategist Royal Fund Management, LLC.

In our December 11, 2015 market comments posted to the website titled Oil & Interest Rates, we said though we remain bullish intermediate and longer term, “we would not be surprised if the market is weak short term.”  We did not, however, expect the year to begin with the worst five day start in market history. Happy New Year!Our expectation for potential weakness short term was based on the Fed move on interest rates in December.  When the Fed begins to tighten, it is not unusual to see near term weakness though, since 1950, the market has been up nearly 10% a year after the Fed raises rates the first time.  Economic news out of China and the claimed successful test of an H-bomb by North Korea intensified the selling.  The market is extremely oversold today and we would expect a reasonable bounce soon but, then what?

The market does not like uncertainty and has had plenty to deal with recently. At least the overhanging uncertainty about when the Fed would act, arguably the most significant concern, is now behind us.  The market went down for a while during the “taper tantrum” when the bond buying stimulus was being reduced and, went down short term once quantitative easing (QE) was deemed no longer necessary. In both cases the weakness was short lived and the market recovered within a reasonably short period of time. We expect this time will be no different.

The two other storms the market is challenged by now are China and oil prices. First, China’s economy is growing but, simply not as fast as it had previously. It is interesting that when China gets a cold the rest of the world comes down with a fever.  Consider this; U.S. exports as a percentage of Gross Domestic Product (GDP) are only about 13% and, exports to China represent only about .7% of our GDP.  The U.S. economy today is 88% service and only about 12% industrial. Yes, China’s economy is the world’s second largest but; it seems the tail is wagging the dog here.  America is leading the world economically and the proof is the divergence in central bank policy. Our economy is doing well enough to sustain higher short term lending rates while the rest of the world still needs stimulus.

Oil prices continue to tumble. There are several arguments as to why. Some say it is simply due to a negative worldwide economic outlook. It may also be that OPEC is trying to damage the U.S. oil industry where cost of production is higher in many cases. It has also been said that Saudi Arabia has not limited supply so as to hurt Iran and Russia.  Still others deem that lower oil prices are the best economic sanction against Russia where energy represents 40% of their economy.  Finally, oil prices are often driven to extremes due to speculation.  In any event, current investment spending by the oil industry is not enough to keep up with future demand.

Back to basics:  Though it has been since last May that the market notched an all-time high, the fundamentals always win in time.  Year over year quarterly earnings for the energy sector are expected to be down nearly 68% but, ex-energy earnings are still growing.  Interest rates remain low and there is still plenty of liquidity to come to play. Lower oil prices are actually the equivalent of a massive tax cut for the consumer and are accretive to the earnings of other market sectors.

Loss aversion can cause one to make emotional decisions which are often regretted in hindsight.  We believe the bull market is intact. With the S&P500 trading at 15-16 times earnings (historically average) there are no excesses.  Bull markets do not die due to age.  It is clear that we are not experiencing a time of excess that could derail the market for now.  We are simply not over leveraged and we are not overvalued.  Once again, we believe patience will be rewarded.

If you would like to talk more visit us at http://solidwealthadvisors.com/contact-us/

Royal Fund Management

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