1st Quarter 2016
Uncertainty Prevails. Stay Tuned.
U.S. equity markets hit an all-time high in May of 2015; this occurred after a long recovery from the Great Recession. The recovery was slow and weak. Incomes have barely reached the levels before the Recession. Unemployment rates have returned to about 5%, but are uneven throughout the country. The labor participation rate has only recently begun to recover. Then in May 2015, markets began a decline. A confluence of factors led to the decline. The economy of China began to slow. This slowdown led to a collapse of commodity prices, especially oil, throughout the world. Normally lower oil prices would be considered good news, a tax cut really. But in this case, the drop was so significant and rapid, that producers were caught off guard. Commodity producers of all kinds had expected the Chinese economy to continue to grow; they invested and created overcapacity. In the case of oil, the U.S. became a net exporter, which had not been the case for decades. Emerging markets began to falter. Banks were under pressure again. Equity markets decided to steer clear of all this risk. Central banks throughout the world cut interest rates, some into negative territory. Currencies […]
4th Quarter 2015
Of Sheiks and Shale
”None of the postwar expansions died of old age; they were all murdered by the Fed.”
-Rudi Dornbusch, MIT economist
In May 2015, the markets hit an all-time high. By August the markets were down 11%. The decline was due to an apparent slowing in the Chinese economy and a surprise devaluation of the yuan by China. While the Chinese economy, the second largest in the world, appeared to be slowing, confirmation was hard to obtain owing to the opaque nature of Chinese economic reporting. But, there was no mistaking the yuan devaluation; it caught everyone by surprise. Another sign that the Chinese economy was slowing was the decline in commodity purchases by China. Lacking many resources, China is a big buyer of commodities on the world stage, and producers were definitely seeing a slowing of purchases. With the yuan falling and commodities weakening, Chinese investors began to pull money from their markets and move money out of China. Companies did the same. The Chinese equity markets tumbled. This upheaval was felt throughout the world, as prices of commodities fell sharply. Extraction of natural resources, except for oil, was cut back. The price of oil fell dramatically.
Market Opens Year With The Worst Start Ever
Dow down 10% from its all-time high set in May of 2015
Is it time to panic?
A start to the year like we are having is attention grabbing. We have seen these events before and will see them again. You know Rutherford Investment Management as a long term investor and that has served our clients well over the years.
The markets and the economy were weak at the end of 2015 and getting weaker. The international monetary fund warned that the global economy was weakening; indeed they just downgraded global economic growth. The U.S. was finishing its 11th year of sub 3% growth. But on December 16, 2015, the Federal Reserve, citing an improving economy and incipient inflation, raised interest rates by 0.25 %, the first increase since June 2006.
To say they were backed into a corner would be polite. They had cornered themselves, by hawkish comments. If they had not raised rates, they would have lost credibility, but, at the end of the day, they had missed their opportunity and waited too long. By December, the U.S. and the global economies were slowing. No amount of gloss could make this sow’s ear a silk purse.
Almost immediately after the rate increase, the […]
3rd Quarter 2015
More Uncertainty
In March of this year the markets were hitting new highs. All indices shared in the festivities. The unemployment rate dropped to nearly 5%. Oil prices dropped too, giving hope to the consumer economy and diminishing inflation expectations, as inflation all but disappeared. In general, the outlook for the economy was positive. Then, slowly, the outlook began to change.
The International Monetary Fund spoke frequently of the declining outlook for the global economy. We had noted that previously, and we moved our money back to the U.S., saying the U.S. was the “best house on a bad block”. Commodity prices, other than oil, began to decline in response to China’s slowing growth rate.
2nd Quarter 2015
June Swoon
S&P Quarterly results were plus 0.3% through June 30, 2015. Year to date results were positive 1.2% through June 30, 2015. Year to date the market has been volatile, barely holding on to gains for the year. Volatility will continue. Upward moves during the first half were later given up over geopolitical concerns.
At home, GDP growth has been slow, profits so-so and the markets have just not had the catalyst for gains. Headlines have complicated matters. The long dance regarding interest rates has teased investors. Overseas, Greece and China have loomed large. Each time Greece has appeared about to default or leave the Eurozone, or both, the markets have reacted negatively. Each time it appeared a deal between Greece and its creditors might be imminent, the market reacted positively.
1st Quarter 2015
Global economy slows
In this past quarter volatility increased in markets throughout the globe. The Chinese economy, second largest in the world, saw its growth slow even as its equity market doubled. Germany, France, Italy and the U.K. also slowed. Even the U.S. economy, long the strongest in the world has slowed, having been battered by ferocious winter storms and a West Coast port strike. The response in the ex U.S. countries has been to cheapen their currency in an effort to grow exports and grow their economies. Interest rates have been slashed. Europe has embarked on its own version of Quantitative Easing to promote its economies. This strategy has yet to work. Meanwhile, the U.S. Federal Reserve has played with raising interest rates in the U.S., but so far has not had the courage to do so. Talk of raising rates has had the effect of increasing anticipation that interest rates will rise, and the U.S. Dollar has strengthened. Although equities in many countries have increased, the increase relative to U.S. investments has been diminished by the stronger dollar. The dollar has increased 18% against a basket of currencies in the past year and up 30% year on year to […]