2016 begins...
2016 begins... Two big takeaways from 2015... 'The incredible January barometer'... A bad sign for stocks?... China is back in the news... Steve's big call...
Today marked the first official trading day of 2016.
But before we discuss today's action, let's take a quick look back at the year that was 2015...
If you've been with us for long, you won't be surprised to learn energy and commodities stocks, emerging-markets stocks, and high-yield (or "junk") bonds were among the worst performers of 2015.
But given the recent volatility, you may not realize that outside of these areas, most widely held asset classes ended the year more or less unchanged.
According to Bloomberg data, U.S. stocks, U.S. Treasury bonds, corporate bonds, global stocks, global real estate, and emerging-markets bonds all ended the year less than 2% from where they started.
And a recent article in the New York Times suggests there could be two big takeaways for investors here...
First, the central-bank-fueled boom of the past few years could finally be ending...
Since early 2009, low interest rates and "quantitative easing" from the Federal Reserve and other central banks have sent the prices of virtually all assets higher. But as the article noted, this boom was mostly the result of investors who were pushed to take on more risk, not the result of a corresponding boom in the economy...
Part of the explicit point of the Federal Reserve buying up $3.5 trillion in bonds over that five-year period – essentially taking the supply of safe assets like Treasury bonds off the market – was to encourage investors to push money into other, riskier assets.
The efforts by the central banks succeeded at getting investors comfortable with taking risks again. But they haven't succeeded in getting a full-throated economic expansion going.
Second, going forward, returns are likely to be less dependent on what the Federal Reserve and other central banks are doing, and more reflective of the real economy...
Any future gains for stocks will happen because the economy is growing and companies are thereby making more money, not just because investors have been persuaded to accept ever-lower returns for taking on investment risk...
Future returns will depend on whether 2016 is finally the year that all that interventionism starts to translate into higher incomes, more spending, and greater profits in the real economy, not just the financial one.
Unfortunately, the market began 2016 on a sour note...
The S&P 500 fell more than 1.5% today, following Asian and European markets lower. Some of last year's biggest gainers, like Netflix, Google, and Facebook were among the biggest losers. U.S. Treasurys and gold were among the few assets that rallied.
While a one-day decline is no reason to panic, we continue to urge caution on the broad market.
The problems we've been tracking didn't suddenly disappear over the holidays. And if the selloff continues in the coming days, we could soon have another reason for concern.
According to the Stock Trader's Almanac, "as the S&P 500 goes in January, so goes the year"...
The Almanac's so-called "January Barometer" is simple: If stocks end the month up, they're likely to end the year up. If they end the month down, they're likely to end the year down.
Before you dismiss it, you should know it has an impressive track record...
It has registered only eight major errors over the past 65 years, for an 87.7% win rate. Even more impressive, the Almanac notes "every down January in the S&P 500 since 1950, without exception, has preceded a new or extended bear market, a flat market, or a 10% correction."
But it's not just the full month of January that is predictive...
The first five trading days of the year tend to predict where the month will end as well. According to the Almanac, the last 41 up "First Five Days" led to gains 85.4% of the time, and the last 24 down "First Five Days" led to declines nearly 50% of the time.
As always, we never put too much weight on any single indicator. But history says these are worth keeping an eye on.
Like the big declines last summer, today's selloff in the U.S. was blamed on China...
China's Shanghai Composite Index fell 6.9% today, while the smaller Shenzhen Composite Index plunged more than 8%. And China's currency, the yuan, weakened the most since early August, just days before U.S. stocks crashed.
This time, the selling began after a report showed China's December manufacturing data were weaker than expected. But it was exacerbated by a new market "circuit breaker" that was launched today. From an article in the Wall Street Journal...
A new circuit-breaker system for Chinese stocks kicked in after steep declines on a benchmark of blue-chip shares. Chinese officials announced plans for the system in December, as a measure to prevent the wild swings that accelerated last summer's selling.
But analysts and investors say the circuit breaker could trigger more selling, as the freeze spooks investors and losses snowball, setting off the halt all over again. "The circuit-breaker system actually creates a downward spiral" as more investors get nervous about trying to get out before others, said Hao Hong, managing director at Bank of Communications Co. "Having this so-called system in place is actually making the selling worse."
The first trading halt on China's mainland stock exchanges came shortly before 1:15 p.m., when the CSI 300, a benchmark of the largest 300 stocks listed in Shanghai and Shenzhen, fell 5%, triggering a 15-minute halt under the new rules. A further slide to 7% triggered a second halt under the new system, this time for the remainder of the day.
Regular readers know our colleague and True Wealth editor Steve Sjuggerud has been following the Chinese markets closely.
Steve shared his thoughts on today's selloff with us in a private e-mail this morning...
A 7% fall in one day is scary. Tomorrow could be bad as well, as the Chinese authorities literally halted trading once stocks fell that much.
This was one day. Keep in mind, my China story is a five-to-seven-year story... The gains will be incredible at some point. I expect they will be some of the biggest of my career.
The thing is, Chinese stocks are volatile... We want to participate in the uptrends and avoid the downtrends along the way by following our stops.
Our stop on the iShares China Large-Cap Fund (FXI) is pretty close right now. Our stop on the Morgan Stanley China A Share Fund (CAF) is much farther away now after it paid out huge dividends last week.
The reality with China stocks is we may get stopped out – more than once – before we see incredible gains. I'm OK with that, but if you aren't, don't invest in Chinese stocks. It's going to be a volatile – and likely an incredibly profitable – ride.
Steve was among the first analysts anywhere to correctly predict the Chinese yuan would be granted reserve-currency status last year. And he first recommended Chinese stocks to his readers in 2014 before they soared more than 100% last year.
As you can see, Steve is still bullish on China... and in the latest issue of True Wealth, he called Chinese stocks one of just four opportunities in the world with triple-digit upside today.
Steve's True Wealth subscribers can access the January issue right here.
New 52-week highs (as of 12/31/15): none.
We're starting off 2016 with a little positivity in the mailbag. As always, send your notes – good or bad – to feedback@stansberryresearch.com.
"You asked your readers to write a quick note if you've helped us in any way. I just want to say thank you for your thorough research and warnings. As a more conservative investor, I took your Ralph Lauren [trade from Stansberry Alpha] and put on a 10 contract Iron Condor (with lower strikes). I expect to add an extra $800 to $1,000 per month to my portfolio on this strategy alone as I roll the Condor forward each month. I hope to save up enough 'extra' cash to join your Stansberry's Credit Opportunities newsletter as I can see the potential there. Keep up the great work." – Paid-up subscriber Scott Smith
"Porter, thank you for a successful 2015! You always tell us that there is 'no teaching, only learning'. Wow, isn't that the truth. We are responsible for ourselves as investors and as people. For those of us that recognize that, you and your work could not be more valuable. Unfortunately, some don't get that immediately and yet you never stop trying. Thank you for that.
"For those of us willing to step outside our comfort zone and learn something new, a world with endless opportunities (but not capital) awaits. Your idea of 'allocating to value' has truly been a game changer for me. It makes all other investing decisions seemingly obvious like when to buy bonds, when to buy stocks, when to sell puts, when to raise cash, etc.
"Please bring your podcasts back one day (revenue positive). We miss your thoughts on the world and random banter with Aaron. All of this to say 'Thank You'. Thank you for leading this horse to water and nudging his head into the water (not dunking). You, your work and your team have changed my life forever. I can't tell you how happy I am for your success. You have earned it. I feel lucky to be a small part of it." – Paid-up subscriber Jesse H.
"Hey Mr. Stansberry, my name is Victor and I currently don't invest in any stocks because of some bad advice received in the past which cost me $12,000; pretty much my whole portfolio which was money received from wedding gifts. This money was important to us, we weren't trying to get rich we just wanted to send our kids to quality private schools to give them a good education and to help them grow up to be great thinkers and make right choices in life, to see the lions from afar and avoid them; not make the same mistake dad did. As you know there isn't anything you wouldn't do for your child which is why only I work making 40k a year and my wife stays home raising the kids, giving them what no babysitter would. Due to our loss it is likely our three kids won't go to private school, dreams crushed in a blink of an eye.
"Enough with the sob story, let's get to the point. I have had a fear of the stock market following our loss a couple of years ago and have been reading and watching your advice for about a year now. Even though I haven't invested in the market ever since our loss due to, well, not having any money to invest and the fear of losing more, I have been monitoring your advice on the economy in general and your advice has allowed me to make some good choices with the tangible goods that I have. Knowing where the economy is going I was and am able to prepare myself for things to come. Your newsletters are geared more towards investing but contain life advice outside of investing, there is wisdom in between the lines which I have incorporated into my work, family, and church life. When you wonder 'Is anyone benefiting' you bet your ass someone is benefiting. My friends may not read your newsletters but benefit from them because I read them. I'm now 29 years old, I currently don't invest in the stocks or bonds but this is not because I still fear, it is because my financial situation doesn't allow me to. I'm one of those people that doesn't get lucky, I have to work hard for everything in life and once I work my way out of this hole I will be using your investment advice as well as your wisdom.
"Who knows if this will ever be read, sitting in between the other thousands of e-mails but thank you for what you've done. I didn't want to write a lot, tried to keep the email as short as possible but I hope I was able to portray your impact on lives if not in my words then hopefully you're able to see it in-between the lines. Take care and God bless!" – Paid-up subscriber Victor
Regards,
Justin Brill
Baltimore, Maryland
January 4, 2016
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