The New Year has begun with the worst decline in the global equity markets in history. The decline and negative trends began to appear in the weeks leading into the end of 2015. A confluence of geo-political events including Saudi Arabia and Iran combined with North Korea’s bomb test collided with a China stock market crash as the 2016 calendar turned. These issues exacerbated the real challenges posed from a continued crash of oil prices to disrupt the global markets and has instilled a global fear in investor psyche. On top of these external shocks and headlines, the U.S. equity markets are still adjusting to the change in direction at the Federal Reserve Bank as equity prices wrestle with the potential for rising interest rates. The Fed remains confusing in their continued statements and their lack of clarity weighs on the markets. This backdrop of the Fed raising interest rates has not been on investors’ radar in over a decade and many portfolio managers today have never lived through a rising interest rate environment. The barrage of simultaneous negative headlines and concerns has been too much for equity investors to digest early on in 2016.
Our Tactical models and strategies have worked early in 2016 to provide some insulation for investors. Most of our Tactical Strategies became defensive later in 2015 or very early in 2016. Our High Income Bond strategy has been 100% in money market since 12/9/15 as the models picked up on the weakness in the lower end of the high yield credit market tied to energy firms. Our Tactical Opportunity Strategy has been mostly in cash since mid-December as well given the equity market volatility leading into the New Year. Our Tactical Balanced Strategy began the New Year underweight equities with 50% in the S&P 500 Index, 25% in the Barclays Agg and 25% in money market. On Tuesday of this week, the strategy became more defensive by moving an additional 25% out of equities into money market to stand today with just 25% in equities and 25% in the Barclays Agg and the remainder 50% in money market. Our Global Tactical Balanced Strategy picked up on the challenges throughout the end of December and rebalanced on January 2nd to 48% in cash and bonds (26% cash and 22% fixed income). Our aggressive Sector Rotation equity strategy also became slightly defensive and moved to 25% cash on January 2nd with the remainder in equity sectors.
The tone of the markets and the technicals remain very challenging as equity investors awake each morning with new information on the price of oil. At the same time, Wall Street awaits a barrage of U.S. corporate earnings reports that begin in earnest this week. The chart below illustrates the difficult technical environment by showing the percentage of stocks that are below their 200 day average. This has certainly been a challenging sell off. Expectations for corporate earnings are not great but we are hopeful that the results from corporate America can pull the attention from the negative headlines to the underlying fundamentals. The U.S. economy remains on solid ground characterized by slow but steady GDP growth, full employment, modestly rising wages, a healthy consumer, a solid housing market and still very low interest rates. The rolling correction that occurred throughout 2015 in the U.S. equity markets combined with the very negative start to 2016 has reduced equity valuations significantly. Importantly, we are not seeing the excesses across our economy that would typically be a pre-cursor to a market meltdown. At the same time, global consumers are receiving an effective tax cut in the form of dramatically lower energy costs which should continue to support consumer spending. Lastly, liquidity measures in Europe are beginning to show some positive results and stimulus from major international economies including Europe remains robust.
The coming days and weeks are likely to remain volatile given the large amount of news flow expected from corporate America. We are hopeful that corporate earnings can be a catalyst for some stabilization in equity markets as we believe earnings still drive stock prices and our expectation is that earnings remain sound. Simply put, we don’t believe earnings, outside of energy and energy related sectors, are that bad. A stabilization of equity prices followed by a slow and steady recovery would be welcomed news for our tactical strategies and investors alike. In the meantime, our Tactical strategies remain in a defensive posture seeking better price trends.
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