January stunk it up. The first two weeks of January really reeked. January stunk it up so badly that it made 2015 smell good. And February is starting out like it wants to make January smell good.
After the first two weeks of January, U.S. markets were down about 8%. Foreign markets were slightly worse. That was reportedly the worst two-week start in the history of the U.S. stock market.
The second half of the month was a little better with U.S. markets finishing the month down about 5% and foreign markets down almost 7%.
The first week of February found U.S. markets down another 3%, while foreign markets fared a little better, losing a little over 1%.
The alleged instigator of all this selling was China. It seems like whenever anything goes wrong anymore; we blame China. It’s easy, convenient and no one really disputes it.
In this January sell-off, China may have actually played a role. The night before our markets opened on the first trading day of January, the Shanghai Index dropped 7%. It might have dropped even more, but the Shanghai stock market has a “circuit breaker” that halts trading when the index declines 7%. That particular trading day seemed to cause markets all over the world to sell off. The reasoning being that if things were that bad in the second largest economy in the world, they probably were not going to be any better elsewhere.
Several days later, it happened again. Shanghai dropped another 7% and markets all over the world took another dip.
At no point in January were we concerned that we were looking at the beginning of a 2008 market plunge, but it was impressive to watch nevertheless. The volatility was unusually high as the stock market increased/decreased over 1% in seven of the first ten days. Of those seven days, three of them were DECLINES of over 2%.
It is my experience that volatile markets ultimately only go one direction… down. Although the Dow Jones Industrial Average might rally 200 or 300 points one day, a market that is perpetually volatile seems to eventually give it all back.
We had increased our cash positions in November and December, so it has been perversely easy to silently root for the stock markets to decline more (temporarily) and invest that cash at lower prices.
That’s a difficult concept for most investors to grasp… the idea that declining market prices can be an opportunity, not just the end of the world.
We still don’t see this as a repeat of 2008 (the S&P declined 55% in 2008/2009), but as more of a correction for a stock market that has not experienced a significant correction in over five years.
Prior to the 2008 recession, economic factors were much worse than they are today. Two major investment banks imploded (Bear Stearns and Lehman Brothers). We had double-digit unemployment. Debt levels were higher than ever for the average citizen. Billions of dollars of sub-prime mortgages led to a real-estate bubble and subsequent crash.
None of that is happening today (although car loans are beginning to get a little dicey).
Although our cash positions are higher than usual, we are being careful and slow to take advantage of “bargains.” We think this sell-off will provide us with plenty of opportunities to invest.
As an investor, you might think there is some strange correlation between the price of oil and the stock market. After all, for the past year, it seemed that when the price of oil declined, the stock market fell also. If you look at the last couple of months of the graph below, you can see that, indeed, the white line (oil) and the green line (the S&P 500), have been bouncing up and down together… somewhat.
Typically, there is not a lot of correlation between oil and stocks. And if you look at the previous 4½ years of this 5-year graph, you can see very little relationship between oil and the stock market.
So why are they bouncing around together all of a sudden? As I wrote in December (Don’t Be in a Hurry to Get That Mortgage), China recently hit the brakes and the rest of the world went through the windshield. For over a decade, the Chinese economy has been growing allegedly at a ridiculous annual rate of around 10%. It turns out that some of that “growth” was rather artificial in nature in the way of building office buildings, apartments and highways that didn’t need to be built.
You can only build needless structures for so long. China apparently decided it had been long enough. And the global growth engine began to slow down.
The raw materials that China had been demanding for so many years (iron ore, copper, oil, etc.) began to decline in value as demand decreased.
This is not horrible news for the U.S. since our exports don’t rely on raw materials. We don’t have a large exposure to China, and we export a lot of manufactured goods (iPhones, automobiles, washing machines, etc.) rather than raw materials. However, many countries, particularly emerging markets, rely heavily on things dug out of the ground.
But even our manufactured goods are not selling the way they used to for two reasons:
- Foreign countries are not making as much money for reasons listed above, so they don’t have as much to spend on our exports.
- Our products have become more expensive to other nations because of the strong dollar.
At Boyer & Corporon Wealth Management, we view the current stock market decline as an opportunity to purchase quality companies at lower prices. We feel this opportunity is not a “quick window” and are taking our time to deploy the cash that we have been sitting on for a couple of months.
The Bank of Japan went “negative interest rates” last month, the fifth developed nation to do so. Yes, they are charging interest for holding money instead of paying interest. This is a further sign that interest rates are not going higher. We are keeping our durations long and looking for opportunities to extend them further. We feel interest rates may not increase for a long, long time.
This information is provided for general information purposes only and should not be construed as investment, tax, or legal advice. Past performance of any market results is no assurance of future performance. The information contained herein has been obtained from sources deemed reliable but is not guaranteed.