This year has begun with market activity that has left many investors nervous. Although economists noted the overall U.S. economy was performing at a decent level throughout January and February, the markets reacted sharply to fears over China and lower oil prices. The S&P 500 declined by a little more than 10% as of mid-February, leading to talk of recession in some media outlets. Economists as a whole did not endorse this speculation, but could not definitively say if or when the market would recover.
The decline in overall stock prices occurred in tandem with a falling of oil and other commodity prices. Many parts of the world are expected to have slower economic activity in 2016, with China most notably experiencing slower economic growth. Declines in commodity prices appeared to be a reaction to various projections of slowing overseas activity. Data on the economy led to an uptick in commodity prices in late January and into early February. The broad stock market followed suit and gained back some of the ground lost earlier in the year. As of March 6th, the S&P 500 has regained most of its earlier declines, now posting a modest year-to-date decline of less than 2%.
It is difficult to call either a market high or low until well after the fact. While few are willing to definitively state that the bottom has been reached and passed, a number of analysts are now stating we have likely passed the bottom. There are a number of reasons for them to begin to make this call. Both Canada and Australia have economies heavily reliant on commodities. Canada has a large oil sector and mining is important to the Australian economy. Both currencies took a hit starting in 2014 as we saw non-oil commodity prices begin a decline.
The graphs of both the Canadian and Australian stock markets mirror their currency graphs with declines from mid-2015 and then bouncing back in February. Commodity based company stocks such as Freeport-McMoran (copper), Alcoa (aluminum), and indices like the Dow Jones U.S. Steel Index all show declines beginning in the summer or fall of 2015, with bottoms in late January.1 While it is too soon to definitively call a bottom to recent commodity and market activity, a number of signs are pointing towards this being the case.
United States Economy
Employment – The unemployment rate continued its slow decline to 4.9% in February. This was accompanied by a small increase in the labor force participation rate, meaning that the decline in unemployment is a result of increased employment and not workers giving up on looking for jobs.2 In fact, the discouraged workers (defined as persons no longer looking for work as they believe they will not find any) figure is down 18% from the previous February.
An interesting development in the current labor market is wage growth. The average wage in February 2016 is 2.2% higher than for February 2015.3 Costco is a notable example of this upward wage pressure, making national news with their increase of a minimum wage to $13/hr. They are not the only company to note pressure to increase wages in order to stem employee turnover and attract desirable workers.
Corporate Earnings – Corporate profits remain steady overall. We are seeing a smaller group of companies project earnings growth in 2016 compared to the number of companies projecting growth in 2012 and 2013. This is a more mature market that is holding steady. Dividend paying stocks remain attractive as investors seek alternatives to low interest rates paid by bonds.
Other sectors – Statistics for the overall U.S. economy continue to portray a boring, yet positive picture. The economy is continuing its slow, steady growth with healthy levels of new-vehicle sales for February, greater than expected existing-home sales for January, and manufacturing and purchasing data in line with a GDP growing at about 2% annually.
2016 has gotten off to a volatile start, with markets regaining much of the ground lost in early 2016. Commodities look to have been oversold in this period. Recent price rebounds in commodity prices have been led by currency and stock market reversals in Canada and Australia, historically a signal of stabilizing or growing commodity prices. The U.S. economy is in better shape, continuing its slow, steady growth. We expect 2016 to continue to show steady U.S. growth and a recovery within a number of commodity sectors.
The information contained in this newsletter is for general use, and while we believe all information to be reliable and accurate, it is important to remember individual situations may be entirely different. The information provided is not written or intended as tax or legal advice and may not be relied upon for purposes of avoiding any Federal tax penalties. Individuals are encouraged to seek advice from their own tax or legal counsel. Individuals involved in the estate planning process should work with an estate planning team, including their own personal legal or tax counsel. Neither the information presented nor any opinion expressed constitutes a solicitation of the purchase or sale of any securities.The information contained in this newsletter is for general use, and while we believe all information to be reliable and accurate, it is important to remember individual situations may be entirely different. The information provided is not written or intended as tax or legal advice and may not be relied upon for purposes of avoiding any Federal tax penalties. Individuals are encouraged to seek advice from their own tax or legal counsel. Individuals involved in the estate planning process should work with an estate planning team, including their own personal legal or tax counsel. Neither the information presented nor any opinion expressed constitutes a solicitation of the purchase or sale of any securities.