David Moenning

About the Author David Moenning

David Moenning is a the Chief Investment Officer at Heritage Capital, which focuses on active risk management of the U.S. stock market. Dave is also the proprietor of StateoftheMarkets.com, which provides free and subscription-based portfolio services. Dave began his investment career in 1980 and has been an independent money manager since 1987. Thus, Dave has been live on the firing line and investing for a living for more than 25 years.

Putting 2015 in Perspective and Looking Ahead

It is my sincere hope that everyone enjoyed the holiday season and took some time to get away from the blinking lights for a week or two. But now it is to time to hit the reset button and get to work, for 2016’s game is about to begin!

As we enter another new calendar year (which, by the way, will be my 30th year being responsible for other people’s portfolios) the markets couldn’t be more conflicted. Concerns about global growth, Fed policy, the U.S. manufacturing sector, earnings, inflation, and the state of oil’s ongoing dive appear to be the focal points as we enter 2016.

For the macro crowd, the current myriad of uncertainties coupled with a fresh calendar means it is time to place your bets on (a) what will transpire on each front and (b) how the markets will react.

The problem – well, at least for me – is that even if my crystal ball wasn’t in the shop and I was able to somehow predict when oil’s decline will end, when the economies of China and Europe will perk up, and how many times the Fed will raise rates in 2016, I have little-to no confidence that I could ALSO predict how the markets will react.

Although the allure of making the big macro “call” remains strong in the wake of the 2008 debacle (and I’m fairly certain that the movie, “The Big Short” will inspire legions of investors to try and make a big call for 2016), getting that call right remains difficult at best.

Consider that the hedge fund industry, which is all about getting those big calls right, had one of the worst years on record in 2015. There have been many examples of high profile hedgie managers getting their heads handed to them last year, including media darling Bill Ackman. According to published reports, Pershing Square’s flagship fund was down more than -20% for the year late in December.

2015: It Was Tough Out There

Which brings me to my first point on this fine Monday morning: Please do yourself a favor and stop worrying about the money you didn’t make in 2015.

You see, the bottom line is that calendar year 2015 was rough – really rough.

Although there wasn’t a big, bad decline such as those seen in 2001-02 or 2008-09, 2015 wound up being a VERY difficult environment to make money – anywhere.

After zooming up and down and back and forth, the S&P 500 wound up losing -0.73% last year. The Dow was down -2.23. And the usually dependable small-caps didn’t work as the iShares Russell 2000 ETF (NYSE: IWM) dropped -5.85%.

Oh, and in case you’ve been living in a cave, commodities were crushed in 2015. The commodity index ETF (NYSE: DBC) was down -27.6%. And unfortunately, bonds were no panacea.

As a result, asset allocation didn’t have a good showing either last year. Morningstar’s Conservative Allocation category sported a loss of -2.31%, the World Allocation category was off -4.17%, and the Tactical Allocation Category fell -5.95% (apparently trying to make ANY moves in the market backfired). In other words, almost everything declined a bit in 2015 – and there was really nowhere to hide.

Reality Check

Armed with this information, it is important for investors to be able to admit that 2015 was a tough year. In short, 2015 was a year where “losing the least amount possible” was the goal.

So, before you pick up the phone and fire me or any other investment manager, you should recognize that this is just the way the game goes sometimes. Remember, in the investment business, returns come in bunches — and not in a nice, steady stream each year that all those mutual fund mountain charts would have you believe.

For example, investors probably made big returns in 2013 as the S&P was up nearly 30% on the year. And from the July/August low of 2011, my calculator and my weekly chart of the S&P suggests the S&P was up about 80% in early 2015.

The point is that when viewed from the proper perspective, the declines seen in 2015 aren’t a reason to be overly upset – it’s just the way things work from time to time.

But Wait, There is Hope for 2016!

In looking ahead, most Wall Street firms are projecting that 2016 will be a continuation of the low-growth difficulty that was seen in 2015. However, as you may know, Wall Street’s “experts” aren’t any better at predicting the future than anyone else.

According to a study of Wall Street strategists done by Birinyi Associates, the 22 strategists surveyed have forecasted single-digit returns for the stock market in 2016, which is the same forecast they’ve had for each of the last five years. And yet, the S&P 500 has put up double digit gains in four of those five years!

In addition, Ned Davis Research Group tells us that 2015’s “weak results” are actually a very good reason to be hopeful for 2016. Wait, what?

In a recent report, entitled “2016 Global Market Outlook – Expect a Strong Year for Global Equities,” NDRG’s Tim Hayes points out that since 1941, the median gain for years following a weak calendar-year return when a secular bull market has been in play has been +26.8%!

This is by no means a consensus opinion. In fact, predicting a strong year in 2016 flies in the face of the fears regarding the economy, oil’s impact on the debt markets, corporate earnings, China, etc. But this, my dear readers, is also what makes up the proverbial “wall of worry.”

Recall also that the stock market has been following the 2011 script to a “T” since the beginning of 2015. And if this pattern continues, the outlook, while likely to be bumpy, is pretty solid.

So, while I’m not big on predictions, it IS awfully nice to see one of the most respected firms in the country looking for a good year in 2016.

But now it is time to get back to the matter at hand. So, let’s hit the reset button this morning and get back to business.

Turning to This Morning

Stocks are tanking worldwide on this first trading day of 2016 in response to a massive sell-off in China and fresh geopolitical issues in the Middle East. In China, a fifth consecutive month of weakness in the manufacturing data caused traders to flee, triggering circuit breakers when the Shangai index fell 7% intraday. The Shenzen market closed near levels seen last in February 2007. Next, oil is rallying this morning on renewed geopolitical concerns in the Persian Gulf. Saudi Arabi severed diplomatic toes with Iran over the weekend in response to the storming of its embassy in Tehran. Bahrain also cut ties with Iran. The response in the equity markets has been a sharp selloff. European markets are down more than 2% across the board , Dow futures are down nearly 300, and S&P futures are currently trading down more than 1.6%. So, buckle up as it looks like 2016 is going to get very bumpy, very fast.

Today’s Pre-Game Indicators

Here are the Pre-Market indicators we review each morning before the opening bell…

Major Foreign Markets:
    Japan: -3.06%
    Hong Kong: -2.68%
    Shanghai: -6.87%
    London: -2.41%
    Germany: -4.20%
    France: -2.72%
    Italy: -2.78%
    Spain: -2.55%

Crude Oil Futures: +$0.38 to $37.39

Gold: +$11.40 at $1071.60

Dollar: higher against the yen, lower vs. euro and pound

10-Year Bond Yield: Currently trading at 2.227%

Stock Indices in U.S. (relative to fair value):
    S&P 500: -33.10
    Dow Jones Industrial Average: -273
    NASDAQ Composite: -87.40

Current Market Drivers

We strive to identify the driving forces behind the market action on a daily basis. The thinking is that if we can both identify and understand why stocks are doing what they are doing on a short-term basis; we are not likely to be surprised/blind-sided by a big move. Listed below are what we believe to be the driving forces of the current market (Listed in order of importance).

  1. The State of Global Growth
          2. The State of Corporate Earnings 
          3. The State of Global Central Bank Policy

The State of the Trend

We believe it is important to analyze the market using multiple time-frames. We define short-term as 3 days to 3 weeks, intermediate-term as 3 weeks to 6 months, and long-term as 6 months or more. Below are our current ratings of the three primary trends:

Short-Term Trend: Negative 

(Chart below is S&P 500 daily over past 1 month)

Intermediate-Term Trend: Neutral
(Chart below is S&P 500 daily over past 6 months)

Long-Term Trend: Moderately Positive
(Chart below is S&P 500 daily over past 2 years)


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