Global stock, bond, oil and gold markets continue to bounce around as investors look for trends that signal a re-entry into stocks. Today, I’d like to review facts vs. fiction, in order to give us a little more peace as we live through the stock market correction.
Investors’ worry: Banks will fail
Consequence: Investors are selling bank stocks and bonds.
Reality: Last week, Deutsche Bank announced a repurchase of $5.4 billion of its bonds. Yesterday, Moody’s Investors Service stated that Deutsche Bank will have no problem repaying its riskiest Tier 1 debt in 2016 and 2017, unless “a major, unforeseen event” were to occur. Clearly, Deutsche Bank would not spend $5.4 billion on non-mandated bond repurchases if the bank were cash-strapped. In addition, CEOs and bank executives at J.P. Morgan, Citigroup, Zions, Huntington Banc, KeyCorp and Radian Group all made significant bank stock purchases last week, signaling to the market that they believe their companies are healthy and their stocks are undervalued.
Investors’ worry: Falling oil prices will cause a stock market crash
Consequence: Investors have cashed in stocks--largely via mutual fund exchanges into money market and bond funds within their retirement accounts.
Reality: The S&P 500 index closed at 1,864.78 on Friday, which is 12.3% below its all-time high from July 2015. A 12.3% move is a correction, not a crash. For perspective, the S&P 500 fell 12.2% from its closing high in July 2015 to its low in August 2015, then rebounded to within 0.8% of the July high by early November. In addition, while energy companies certainly do not benefit from lower oil prices, virtually all other industries benefit from lower oil prices. That’s because they’re spending less money than they budgeted on energy, resulting in stronger cash flow, which can be redirected towards hiring people, buying machinery, expanding into new markets, advertising, etc.
Investors’ worry: We’re going to have a recession
Consequence: Investors are cashing in their stocks.
Reality: As I’ve mentioned in several prior issues of Smart Investing in Turbulent Times, we’re already in a manufacturing recession. However, consumer spending does not reflect a recession; reiterated by Friday’s positive January retail sales report, which came in higher than expected, despite lower oil prices and an East Coast blizzard! Consumer spending is causing increases in annual GDP. Consumers have more money to save and spend because employment, working hours and wages have all increased. You can see this trend reflected in the rising profits at General Motors, D.R. Horton, Royal Caribbean Cruises, E*Trade and FedEx! What’s more, with more than 75% of S&P 500 companies recently reporting earnings, 75% of that group exceeded consensus earnings expectations, despite the negative effect of the strong dollar.
Investors’ worry: The Fed doesn’t have a handle on what to do with interest rates
Consequence: Investors are not buying stocks.
Reality: I can honestly say that the Federal Open Market Committee (FOMC), currently led by Chairman Janet Yellin, has been manipulating interest rates for so many years now that I give no professional credibility to anything they say or do. Interest rate trends based on the real economy are interesting and somewhat predictable. However, interest rate trends based on manipulations by the Obama administration are annoying, and for me, they have become irrelevant. It was clear in December that inflation was not strong enough to warrant a Fed Funds rate increase; yet the FOMC increased the Fed Funds rate because they’d been telling everybody that they would for many many months. I believe they were simply trying to save face.
Where does all this leave U.S. stocks?
In last week’s Smart Investing update, I speculated that “the fat lady” might be signaling a market bottom. We won’t really know if last week was, indeed, the bottom of the current stock price correction until the upturn begins. However, I am more encouraged now, based on bank repurchases, individual stock charts and rising markets in Europe and Japan, that we have seen the worst of the correction in S&P stocks. In addition, for the first time in many weeks, there are enough stocks that have turned upward that I can eagerly point to buying opportunities. I love buying low! As painful as market corrections are, the silver lining is the market’s rebound.
