Market Commentary December 2015

FINALLY!  After a several months of indecision, the Federal Reserve raised interest rates by 0.25%.  And the market’s reaction?

Not much.  Which is surprising, in our opinion.  At this point, we believe the Federal Reserve had no choice but to do something…anything!

What doesn’t sit well with us regarding the decision is the reasoning behind it.  Generally speaking, interest rates are increased to either slow a fast growing economy or to prevent inflation.  From our point of view, neither of those are issues we are currently facing.  The rate increase seems to be fueled by the Fed’s need to remain credible, rather than any real economic drivers.  What that means for consumers, only time will tell.

Meanwhile, the overall stock market has been without clear direction for quite some time, which has made 2015 an extremely challenging year.  Even the portfolio of the “Oracle of Omaha,” Warren Buffett’s Berkshire Hathaway’s BRK.A shares are down -11.6% YTD (Morningstar data as of Dec 22, 2015).  And as of today, December 23rd, 2015, The S&P 500 was within pennies of where we started on January 1st, 2015.  That means that whatever happens in the S&P 500 between now and the end of the year will be the total performance of the entire 2015 year!  Disappointing, to say the least.

Internally, the S&P 500 has bigger issues as well.  Its overall performance this year (currently slightly positive) can be attributed to only a handful of stocks (currently referred to as the FANGs:  Facebook, Apple, Netflix & Google, among others).  The majority of the stocks of the S&P are in negative territory (some quite a lot)!  We are concerned that this is creating a false positive view as to how the stock market is really operating.

This is just one of the factors that, while not obvious, is essential as to why we believe this market has the potential to go lower rather than higher in the near future.

Another place where we see trouble:  divergence.   Dow Theory suggests the Dow Jones Transportation Index (DJT, shown in grey on the chart) tends to lead the broad market (S&P 500, shown in blue on the chart) in its general direction.  Since mid-summer of 2015, the DJT has been heading very steadily lower.  According to this theory, this direction would indicate a down market in the coming months.  And so far this year the DJT is down approx 25%!  Yikes!

The grey “mountain” (Dow Jones Transportation Index) tends to lead the blue line (S&P 500 Index).  Also worth noting:  the blue horizontal line shows where the S&P 500 started the 2015 year.

Dec2015 Chart

Chart:  1 Year comparison of the DJT (Dow Jones Transportation Index) and the SPX (S&P 500 Index) from Thinkorswim.

Back in the Bonds arena, another area of concern is the High Yield (sometimes called “Junk”) Bond market.  A large amount of money lent in this category was to Oil-related ventures.  This sounded great back when that business was booming a year or two ago.  Now that the price of oil has dropped dramatically, there isn’t much profit in extracting oil.  And if no oil is being extracted, no money is being made.  If no money is being made, then the loans aren’t getting paid.  If this goes on for too long, there could be defaults far exceeding what we saw in the 2007/2008 housing loan bubble.

Overall, we hope that this month’s Fed decision will help lead to some type of clarity in market direction (either up or down).  A clear trend would give us something to act upon, allowing us to utilize our strategies to climb out of the quagmire of this “sideways”  environment.  We are eager to act upon the opportunities of either an up or a down market; as soon as they finally surface…

Finally, the entire team here at Shadowridge would like to wish everyone a happy and safe holiday season.  We appreciate your partnership and look forward to continuing to serve you in 2016!!