Brouwer & JanachowskiApril 1, 2016
Finally. The end of a torrid quarter. What seems like a news filled quarter boiled down:
- Growth slowed, looked better and slowed
- Two major central banks resorted to negative rates
- Oil slipped and recovered
- Some emerging markets hit bottom and rebounded
- Rates ended lower than they started
- Companies had little to say and half heartedly rolled on with buybacks
The major stock markets ended up sideways to slightly up and U.S. bonds held to a gain of less than 1%. Markets lack confidence. They are pulled by macro and headline risk. Earnings, as expected, disappointed. There were no real breakthroughs for the market to sink its teeth into. It was a quarter where it paid to invest safely and not stress at the low points. Here’s how the quarter ended:
We choose these because we mostly positioned client money into Treasuries, TIPS and emerging markets late in 2015. And for now, we hold to most of these portfolio choices. In the final week of the quarter, here’s what also caught our eye:
- Yellen Back Again: in a mid-week speech, the Chair of the Board showed that, while she may allow dissent, she remains firmly in charge. She mentioned “oil” 17 times, “global” 11 times (the Fed has no global mandate), the “dollar “ 7 times (and that’s the Treasury’s job) and “upside” no times. It’s clear what’s on her mind. The headwinds are out there and she’s in no mood to raise rates soon. April is off the table and, June, most likely, as well. On the economy, this is what probably concerned her:
It shows the real time adjustment to the economy. Expectations for 2.5% growth peaked in February. Since then, weaker housing starts, home sales and personal income have brought estimates down to 0.6%. It’s a rough guide. But the direction looks right. Hence the talk about lower for longer.
- Saudi Arabia: monthly statistics from the highly respected monetary authority shows the steady drawdown of foreign assets and securities. As we mentioned, this was going on for most of the last year as Saudi had to uphold its spending in face of a declining oil price and market share. The numbers are staggering. Sales of foreign securities, which presumably meant a fair share of U.S. equities and bonds, were over $540bn. Meanwhile, construction loans went up nearly 20%. It’s worth watching because Saudi Arabia will find it hard to play the oil industry’s moderator under financial duress.
- Corporate Earnings: profit margins for the S&P 500 will fall in the first quarter to around 9.3%. It’s the lowest for three years. Most of this is the energy sector, down to 0.1% but tech and health care are down too. At the same time, 95 companies issued negative guidance for Q1, the highest number since 2006. Surprisingly, the tech sector accounted for 24 of those. Why? Well the strong dollar was the cited reason. But we think it’s as much to do with demand and lower pricing power. What does this mean? Don’t expect much of an earnings boost to stocks. Be patient. It will turn.
Bottom Line: The quarter was much what we thought although the crunch from January to February was alarming. High Yield did better that we thought but we remain unconvinced. Expect quiet markets for a while. Consolidation is good. All is well.
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--Christian Thwaites, Brouwer & Janachowski, LLC
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