Fasten Your Seatbelts!

Gold had its best first quarter in years, up $174 an ounce or roughly 16%! The S&P 500 declined 11% in the first few days of January in what was the worst start for any year ever. It recovered by the end of the quarter to a little better than breakeven year to date. We are now at trading levels first broached back in November 2014. That is not a lot of progress over that time frame.

What are some of the reasons for the volatility?

As we have written in the past, it comes down to earnings. The Wall Street Journal reports “analysts project earnings for S&P 500 companies to slump about 8.5% from a year earlier, according to FactSet estimates as of March 31, with particularly downbeat reports expected from the energy sector. “The corporate earnings outlook is low to flat,” said Oliver Pursche, chief executive at Bruderman & Co. Following a two-month rally in U.S. stocks, “the best word for sentiment right now is probably ‘confused,’ ” he said.”

Weak earnings have been projected and anticipated for months now. It has been difficult to quantify how much the earnings slump has been discounted as equity markets are hovering at higher levels. Energy companies will have the worst declines by far. Oddly enough, energy stocks have had some of the best returns this year, primarily on short covering and hopes of an output agreement by producing nations.

We technically remain in a “bull market” despite earnings. Bloomberg Gadfly writes “only a bear market can kill a bull market, and traditionally it takes a 20 percent plunge from a peak to mark the beginning of one. The S&P 500 is down about 4 percent from its last record, and it never officially experienced a 20 percent drop, even amid the ugliness of August and January, so the bull is still running, at least theoretically.

But it sure doesn’t feel like it. The main reason is that last record was such a long time ago — May 21, 2015, almost a full year. And in fact the level that the index is trading at now was first reached in November 2014, so it is basically where it was a year and a half ago.”

The most recent estimates from analysts show profits returning to 5.1 percent growth in the third quarter and 10 percent in the fourth, according to Bloomberg’s tally.

Another reason: The Fed. They continue to tell us why rates need to go higher and then do the opposite. This has been going on for years now. Great central government planning! A June rate hike is now on their agenda. Don’t plan on one happening for the rest of the year.
This is all going on simultaneously while Fed Chairwoman Yellen has been exploring the possibility of negative rates (you pay a bank to hold your savings) here in the U.S.A. I fail to understand why she thinks negative rates will be beneficial after we’ve been suffering with a Zero interest rate policy in place for several years now.

The policy has been a disaster in Japan and Europe so far. The Wall Street Journal writes “Monetary-policy makers, bankers and economists are looking to the experience of Europe and Japan and asking whether subzero rates would boost the U.S. economy.”

“It is a hypothetical question for now; the Federal Reserve has signaled it expects to raise interest rates by a total of half a percentage point this year, not cut them. But with rates just barely above zero, the recovery getting long in the tooth and Fed Chairwoman Janet Yellen saying in February the U.S. central bank was studying the feasibility of using negative rates should it need to give the economy an extra boost, the discussion is hard to avoid.”

Think about this: In Denmark some mortgage holders are benefitting inversely. With negative interest rates, they’re actually receiving interest payments from the banks they initially borrowed from! Over there the banks pay you to borrow and charge you to save. Excellent central bank planning!

We remain very cautious on the outlook for stocks. There are too many scenarios (militarily, politically and economically) developing with very low levels of certainty. This July we have back-to-back conventions: The Republicans in Cleveland and the Democrats in Philadelphia and anything is possible. Unfortunately, it sounds like certain people are going to express their first amendment rights in anything but a peaceful way.

Spring is here, the flowers are blooming and baseball is back. What could be better? Go out and enjoy the day!

Brock Hamilton
April 2016