Was the market’s fall and rise a big April Fool’s Day joke?
“Aprilsnar” in Copenhagen. Photo: Lars Anderson. Source: Wikipedia
The first quarter of 2016 is over and what did we get? A 10% decline and rise in the broad market averages. The market is now just about where it started out the year, although there’s been a lot of changing leadership within the market. If you didn’t panic and sell at the bottom, not much has changed, right?
Well, there’s a lot going on inside the market, even if things look the same from the outside. Bank stocks are getting hurt because interest rates are staying lower for longer. They make money based on the spread between deposits and loans. If rates stay near zero, their profits will continue to get squeezed. Defensive industries that have high dividends – utilities and telephone companies – have enjoyed significant strength. People still need to pay their phone and electric bills.
The growth companies that dominated last year’s market aren’t so growth-y anymore. Amazon, LinkedIn, and Netflix are down a lot, while Facebook still keeps growing. It seems like the market might be getting a little impatient with firms that see massive growth in their revenues, but those sales gains never seem to make it to the bottom line.
And energy companies that took it on the chin last year are mostly moving sideways, although there’s a lot of shifting within that sector as well. The more indebted exploration companies have struggled, as the vultures circle, looking for assets they might be able to purchase on the cheap. In general, energy companies won’t lead the market higher unless oil prices head higher, and that won’t happen until production falls and demand expands – which hasn’t happened yet. But the vaunted “gas price dividend” – that was supposed to lift consumer stocks – also hasn’t happened. Those firms weren’t leaders or laggers in the first quarter.
So far, the market has done what markets do: it’s sorted the winners from the losers, those firms with strong prospects for growth from those whose fortunes are flagging. It may be efficient, inefficient, rational, or neuro-psychotic, but it’s never boring.
Douglas Tengdin, CFA
Charter Trust Company