The January Effect 2016
2016 is off to a rocky start with global economic uncertainty in China and the persistently low commodity prices that are the result of excess supply and weak global demand. China initiated market curbs last year that went into effect in January and were met with a market test on the first day of trade. This triggered a sell off and several market halts over the course of the first week of trade that shook market confidence and called into question the fundamentals of the Chinese market. This was followed by the reported nuclear test in North Korea and unrest between Saudi Arabia and Iran. The oil price decline has been a big story. While it has been exacerbated by the weak global economic outlook, it also may suggest a very bad outcome for the energy industry that has lead growth in the United States in recent years. This week, a Wall Street Journal article suggested that a very high percentage of drillers in the United States could face bankruptcy if prices stay persistently at current levels. This could have collateral consequences for the banking industry and high yield debt markets that have funded much of the growth over the last few years.
The symbolic rate increase by the Federal Reserve in December can also be layered on top of the issues above. While the increase is only incremental, the directional change in the interest rate policy in the United States fuels uncertainty about how global markets will react as the U.S. dollar strengthens. This coupled with the increasing volume of election year rhetoric suggests that 2016 could be a very difficult year for financial assets. We have been defensive in portfolios over the past several months and may become more so. U.S. fundamentals remain positive but the global backdrop cannot be ignored. One interesting point is that institutional investors have been becoming increasingly pessimistic over the past several months and equity ownership declined to the lowest level in over five years in the 4th quarter of 2015. This may actually be a good contrarian indicator for stocks. Major market declines rarely originate from low levels of equity ownership.
We are very happy to report that Venturi is doing quite well. We are ahead of plan for our business transition after five months. We also added Alex Clendennen, a new member to our team, at the beginning of December, as a Financial Planning Analyst. We expect two other additions to our firm in the first half of 2016.