Market Volatility — still sticking around
As the Northeast dug out from #Blizzard2016 earlier this past week, you could say the slowdown from the storm was a harbinger of what was to come this week in the form of more data pointing toward a slowing domestic and global economy. From my perspective, the Fed’s commentary following their monetary policy meeting this week and the likelihood of the next Fed rate hike slipping from March to May simply confirm that the economy has indeed entered a rough patch. We didn’t really need to see the dismal December Durable Orders Report or the weaker-than-expected 4Q 2015 gross domestic product (GDP) report out this morning, because much of the data in recent weeks clued us in as to what was coming. What did catch me off guard was the Bank of Japan’s move to negative interest rates early this morning, which led to a sharp move higher for the market and the S&P 500 closing up 1.2% for the week, bringing its year-to-date return to -5.6%.
While that was happening, the yield on 10-year Treasuries fell once again, and that led many an investor back into higher-dividend-yielding stocks like the ones we’ve kept in our Tematica Select List. In particular, Physicians Realty Trust (DOC), Philip Morris International (PM), American Capital Agency (AGNC) and AT&T (T) all outperformed the S&P 500 this week from a stock price perspective. The big winner for us, however, was our PayPal (PYPL) position, as the company delivered a great quarter that popped the shares over 13% this week. That brings our return in PYPL shares to just under 8% since early September. By comparison, the S&P 500 fell 1.4% over the same time period. With more companies adopting mobile payments, and even more utilizing PayPal’s back-end services for both mobile and online payments as part of my Cashless Consumption investing theme, you should continue to hold your PYPL shares.
Next week, we have several hundred more companies reporting earnings and the usual start-of-the-month economic data will be coming in. This includes December Personal Income and Spending, which should offer some insight on consumers and their spending habits; the ISM manufacturing index; the global PMIs from Markit Economics; December factory orders and the usual assortment of job creation indicators. Based on the preponderance of January regional Fed reports and January flash PMI reports that showed the slowest expansion in the domestic services economy since December 2014 and the second-lowest reading for the manufacturing economy since October 2013, we should not expect a significant pickup to be seen in next week’s data. If this proves to be the case, I would expect to see the chatter grow over the Fed likely pushing out its rate hike from March to May, particularly if Friday’s January Employment Report disappoints.
I will continue to be vigilant during all of that next week. However, given the sheer number of companies reporting their results, there is a high probability there will be more than a few companies offering weaker-than-expected guidance, much like Apple (AAPL), Boeing (BA), Amazon (AMZN) and United Rentals (URI) did in recent days. Already I’m looking at the kinds of businesses that will weather a slower economy given their inelastic natures. For example, will people stop searching on the Internet? Will people stop eating? Are you likely to slow down your use of social media or streaming video? While we may slow down on discretionary spending, odds are those kinds of services and actions will see modest disruption at worst. I can add another — hopefully you will continue to clean both your house and yourself, just as I plan on doing.
As we exit the earnings storm, I expect calmer waters will start to emerge. At that time, we’ll be putting some cash to work, looking to take advantage of the drop in stocks to buy in at much better prices.
