While you should receive our detailed year end newsletter soon, we wanted to quickly reach out to you to provide our thoughts and action plan.
First off, up until last summer US stock markets have been rather subdued with no correction (more than 10% down) in a few years. Even the dramatic decline in the price of oil which began mid 2014 had been orderly up to late last year.
WHAT’S CHANGED THEN?
China is probably the best explanation with the strong Dollar a contributor too. We have written about both of these before as well as covering the drop in oil in one of our quarterly economic updates at the beginning of 2015. We said you should expect the price of oil to stay low for a while, and that consumers would benefit and eventually spend some of the windfall.
We would boil this market correction down to changing expectations for corporate earnings this year. We don’t see a recession in the US or anything approaching 2008-2009. So take comfort from that. The US only exports something like $120 billion in goods directly to China. Also, interest rates are not increasing to any degree such that this would change how investors capitalize earnings or pose competition for investor dollars. Inflation, too, is still on hiatus. The drop in the price of oil is far from being a negative for our economy. The drop in gasoline prices alone added $134 billion to consumers’ pockets (more than total exports to China) in 2015 versus 2014. So, no recession here unless you live in oil country.
Even without a US recession global companies are exposed to slowing conditions abroad. For example, around half of the sales of companies in the S&P 500 index are from international markets. So Investors are concerned that corporate earnings will not measure up to what was expected in 2016 with the world economy slowing. They’re probably right. With the Dollar up, US firms can become less competitive and earnings abroad translated back into Dollars will be lower than expected just last year. And as we wrote in our year end newsletter, stocks are expensive and probably priced for perfection.
NOW FOR THE GOOD NEWS.
Take a close look at the chart below of S&P 500 profits per share since 1960 and the S&P 500 index value. (The red line shows earnings, and the blue line represents price.) Through war, recession, whatever, never before has the S&P 500 price and earnings failed to find a bottom and recover. This time will be no different–be patient.
The sell off has made some of the companies we own buys again. Many have been holds to use Wall Street jargon. And we have been able to add a couple new names in the industrial sector that we think are high quality and now good values –MSC Industrial Direct in the Smaller Companies portfolio and Rockwell Automation in Equity Income. We are looking for more. You can read more about those additions in our year end newsletter. Most of you, too, have a large portion of your portfolio in bonds. Bonds are up over this period of volatility as investors seek safety. That’s the benefit of diversification.
So again, please be patient but don’t hesitate to call or come in if you have questions, concerns, or your circumstances have changed that may impact your tolerance for risk in your portfolio.
The securities mentioned are not the only securities we have purchased in the last year for our clients. If you would like a list of all securities purchased in the last year, please contact us. Additionally, it should not be assumed that recommendations made in the future will be profitable or will equal the performance of the securities mentioned.