The Market: April 2016

Last month I mused that what the market needs is good economic news from China and stability to oil prices. Since the last newsletter, we actually got such data.

Good economic news from China and oil price stability

Both government and independent data-gathering organizations reported an expansion in Chinese manufacturing for the first time in nine months.

The service economy in China also showed expansion.

Over the past month, we have seen some stability in the oil market.  While global crude remains oversupplied, there are signs that the glut may be stable to moderating.

Global demand for energy is robust and Non-OPEC, Non-Russian production is declining. I’m cautiously optimistic about oil. Time is what commodities need to stabilize and we are well into the current down cycle.

With these two pieces of good news, the S&P500 finished March up 6.6%.

What a roller-coaster in the first quarter!  January was down 5%.  February was down 0.4% and March was up 6.6%.

The ups and downs certainly strain investor patience.  The market swings, amplified by the financial media, in my opinion, make it feel worse than it is.

The S&P500 is only about 4% off its all-time high yet investors feel lousy.  As I wrote last month, it is this pessimism that indicates the bull market is not over.

According to the Investment Company Institute, since January 2014, there has been a cumulative net outflow from long-term stock mutual funds of approximately $49 billion.  There are a lot of folks not participating in the stock market.

As contrarians will point out, if the markets stay reasonably ok, these people will be the buyers that propel stocks higher.  I listened to hedge fund manager, Doug Kass who on a Bloomberg Radio interview made the observation that until the individual long-term investor returns, the stock market will be left to the algorithmic traders and the volatility we have experienced will continue.

Volatility: neither good nor bad

In my mind, volatility is not a good thing but it is not a purely bad thing either.  It is nerve-racking and trying but all it really means is that stocks move up and down more frequently and with higher amplitude.

Looking at the glass half-full, this means that company shares go on sale more often.  Nimble investors, if they can control their emotions and do their homework, can take advantage of the situation and buy what gets hit and sell what gets over-priced.

I heard an analyst say that stocks are the only item that when they go on sale nobody wants to buy them.  Volatility doesn’t mean that stocks only go down, it means they move significantly in both directions.  We saw this in a January that is down 5% and a March up almost 7%.

Moving back to economics, the first quarter saw the US dollar decline against other major currencies.

Throughout 2015, the strong dollar created a significant drag on the profits of US multinationals.  It will be interesting to see how these companies fared with a weaker dollar when they report earnings this month.

— Ian Green, Pendragon Capital Management

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Note: This blog article is intended for general informational purposes only. Nothing in it should be construed as, and may not be used in connection with, an offer to sell, or a solicitation of an offer to buy or hold, an interest in any security or investment product.