Wednesday, January 20, 2016

Liz Ann Sonders is smarter than you

Having switched to a new smartphone over Xmas, I forgot to replace my quicklink to Schwab, and so I've only just now remembered how much I got out of reading Liz Ann Sonders.

So here's her analysis from last week:

Schwab - market perspective. Lots of charts like Baker-Hughes rig count and manufacturing vs services, and scary negative figures like falling corp capex. Quote from the intro:
Happy New Year!? Few investors were sorry to see 2015 go, with its stomach-churning moves ultimately ending up with major indices close to where they started; but the start to 2016 has been decidedly worse. Multiple triple-digit down days on the Dow during the first week of trading likely unnerved investors. To that, we say, stay calm. The apparent catalysts for the selling—geopolitical and Chinese growth fears—haven’t greatly altered the overall picture to any great degree. Chinese economic data was in line with other releases noting that manufacturing is weakening, which is to be expected given their attempt to transition to a more services-oriented economy. Concerns about the continued devaluation of China’s currency as a signal of economic distress appear to be overdone. And the Middle East tension has had no impact on oil prices, while North Korea is economically nonexistent and even their one-time ally China condemned the move. But across asset classes, correlations have shot higher and greater global interconnectedness suggests ongoing bouts of volatility—extreme at times.

The S&P 500 Index closed 2015 down a scant 0.7%, but many stocks lost much more. The overall market was held up by good performance by a handful of extremely popular stock—a phenomenon known as narrowing breadth and often a troublesome sign for equities. No doubt, some of the selling seen to start the year can be attributed to some profit taking in some of those winners.

However, there is a glimmer of hope following the running to go nowhere action of 2015. Since 1970 there have been six “flat” years for the S&P 500 (-2% to +2%), and following those years, the Index returned between 11-34%, which if it holds true would be substantially better than most predictions on the Street. But geopolitical issues, some profit taking, and global growth concerns have contributed to a rough start. Despite this, we don’t believe the long-running bull market is ready to die just yet. As legendary investor John Templeton noted, “Bull markets are born on pessimism, grow on skepticism, mature on optimism, and die on euphoria.” US equity markets seem a long way from euphoria, and much closer to skepticism. We anticipate further volatility and greater frequency of pullbacks; but barring an economic recession, we think a bear market will be avoided and that stock will ultimately break to the upside.

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