Throughout most of last year, the market was flat and was tethered to a tight trading range. Range bound markets are a natural consequence following the torrid ascent of the market from 2012 – 2014 in which the S&P 500 rose over 56%. The markets were due for a rest in order to digest their gains from the previous three years.
If the economy could have gained some traction last year, it might have lifted stocks out of their trading range. But instead, cracks in the health of the economy and the stock market began to appear last year.
In March of 2015, we saw early signs of trouble for the market. The transport stocks rolled over and started making new yearly lows. Remember, transport companies are responsible for moving materials and goods for our economy. If these companies struggle, it telegraphs softness in the economy.
More data on the domestic economy began to reveal erosion. The most recognized sign came in the energy sector in which serious deterioration was taking place. By August, similar warning signs had spread to the industrial and manufacturing sectors, as well.
During this time, most stocks topped out. Only a very narrow list of names managed to maintain forward momentum and avoid breaking down.
The market’s trading range was finally pierced on August 20. Much to everyone’s alarm the market dropped 12% over only seven days, at the end of August.
At this juncture, in addition to the disappointing economy, confusion surrounded the inevitable Fed interest rate hike in September. How could the Fed raise rates in the face of fragile business conditions worldwide? People remembered the ill-fated Fed policy moves of 1981, 2000, and 2007 when the Fed raised interest rates just prior to economic tailspins. This rate increase cast concern on the markets.
Ultimately, the Fed deferred hiking rates until December. The partial recovery in October and November was marked by narrowing participation from the broad market.
During the final months of 2015, the majority of stocks decisively entered downtrends. By December, almost every major sector and asset class rolled over and crossed into bear market territory, defined by a decline of over 20%.
Bear markets hit stocks in companies involved in commodities, transportation, agriculture, biotech, industrials, retail, autos, hotels, housing, healthcare, financials, leisure products, restaurants, drug stores, gaming, electronics, media, and utilities. Mid cap and small cap indices had similar declines so this illustrates the widespread damage to the markets. Virtually no sector was spared.
The mauling weighed on international markets. China, Japan, and Russia dropped over 20%. Most of Asia, Europe, and Latin America also approach these bear market levels.
For the full year, the average stock in the S&P 500 dropped 7% according to Bespoke Investments. Bloomberg adds that through January 15, 2016, the average stock is down over 20% from its highs of last year.
This market is clearly untethered from the trading range of 2015.
Today, we closely watch the key S&P level of 1850. It is an important level because it held in August and October. We are hopeful this level will hold again.
Outlook for 2016
The S&P 500 and the NASDAQ are catching up on the downside with average stock in these opening days of 2016. Eventually, we will look for a promising trend in which the average stock outperforms the S&P500.
The market mayhem can help identify which investments will flourish in the “new economy” that our President recently referred to in his 2016 State of the Union address. Usually, stocks that hold up best during chaos will be the leaders when the markets regain stability.
Key income producing vehicles that are insulated from a stock market decline look promising in this environment. Yields on these types of securities are greater than 4%. Investments like these would be useful while we wait out the current storm.
Other constructive ideas could emerge in the weeks ahead. Infrastructure that facilitates transportation and commerce is vital even if our economy goes into a recession. Many of these companies have a solid lock on their markets. There are also high barriers to entry in this business and operators can improve their profit margins at the slightest sign of improvement in volume.
Energy transport stocks are attractive. These companies provide energy to businesses and homes. These stock prices are low and offer high dividends. Most of these issues have fallen more than 60% from their levels from 2015.
New-household formation in our country is accelerating. Aspirational companies, which capture the imagination of the consumer like Amazon, Home Depot, Netflix, Nike, Restoration Hardware and Wayfair are examples with good prospects.
More good news to the consumer comes from lower gas prices which serve as a tax cut. Most analysts expect continued strong job creation and rising wages in the months ahead. The categories positively affected include housing, recreation and culture, restaurants, and transportation. Acuity Brands, Vail Resorts, Disney, Chipotle, and McDonalds, Union Pacific, and Alaska Airlines are companies that are emblematic.
The markets are currently stretched to the downside but should stage a recovery soon. The scope of this rebound will help to discern the durability of a possible renewed uptrend.
Past performance is no guarantee of future results. Investment management involves the possibility of losses. Significant general stock market moves up and down can influence the performance of client portfolios. Composite returns are based on client portfolios of over $100,000. Not all clients are included in the composites. All returns include the reinvestment of dividends. All returns are net of fees. Composite returns are derived from aggregated, time-weighted returns for clients of Peregrine Asset Advisers. Individual client returns can deviate from the composite returns. While Peregrine uses the S&P 500 as a benchmark, Peregrine does not attempt to mimic the structure of this index. Individual client portfolios vary. The number of securities held also varies per client.