News

Gold, long duration U.S. Treasuries and the U.S. dollar were all strong performers in a month where a continued oil price collapse and concerns surrounding slowing Chinese growth weighed on market psychology. Were it not for a furious rally in the final week of January, the already ‘red’ numbers engulfing risk assets would have been all the more uninspiring. Market drivers on the month were essentially a higher pitched version of the same narrative that closed out the year – the uncertain trajectory of the Chinese economy and a nasty oil bear market. The net effect drove U.S. Treasury yields down sharply despite significant selling by the Chinese central bank in an attempt to minimize the Yuan’s fall. Global equity markets fell over 6% on the month with the more volatile emerging markets (-6.5%) and U.S. small caps (-8.79%) bearing the brunt of the selling. Odds of a recession in the U.S. crept to the 20%-25% range over the course of the month as U.S. manufacturing contracted at its fasted pace in six years and investors began to fear ripple effects (defaults, layoffs, reduced capital expenditures) of the oil industry crisis throughout the U.S. economy.

Markets continued to focus on central bank activity with the narrative out of Europe being a likely increase in accommodative measures while Japan joined the ranks of negative interest rate markets in an attempt to aid their weakening economy. The Fed came into the new year well-documented, projecting four rate hikes in 2016. As financial market volatility grew and global economic activity waned, the Fed hike narrative softened as the month wore on. Despite the troubling fact that the correlation of equities with central bank purchases is 3x the correlation of equities with earnings growth, the highly anticipated earnings season began in earnest in January with fourth quarter results and 2016 forward guidance. Results thus far have been mixed with S&P 500 revenue -4.6% and earnings -6.3% and notable negative guidance for 2016. Meanwhile, 2015 full year earnings ex-energy are projected to have grown 5% y/y. Bond markets were anxious in January as well with spreads in energy (1445), industrials (972), and materials (911) all very elevated while spreads in the broad high yield market now sit over 800 above comparable U.S. Treasuries.

Accommodative central banks, reasonable equity market valuations, U.S. housing market strength, and the longest ever job creation streak in American history offer the bulk of the constructive view of the markets. Developed market economies of U.S., Japan, and Europe look like slow growth for certain but recession currently seems far from certain.