This year started off as the worst ever for the 119-year-old Dow Jones Industrial Average. But in just 24 days, the Dow has retraced its entire 10%-plus decline. That’s the fastest stocks have ever gained back a drop of that magnitude.
Then there’s the issue of where this bounce back is coming in the market cycle. Assuming you still believe this is a bull market, it’s roughly the second-longest in history. That means it would be remarkable (historically speaking) if this rally marked the start of a fresh leg up rather than just a bounce.
Then there’s the issue of which sectors are leading and which are lagging. I’ve been arguing for a while that we’re very late in the economic and credit cycle. It’s a time when economically sensitive, lower-yielding, higher-risk assets lag … and non-economically levered, higher-yielding, lower-risk, and lower-volatility names shine.
|A strange start indeed to 2016 for the markets.|
Sure enough, Bloomberg points out that utilities and telecoms are leading by a wide margin so far this year. As a matter of fact, utilities are up a hefty 13% less than three months into the year. That’s the best performance relative to the broader market in any year going back to at least 1989.
Or in other words, safe is sexy. That’s very similar to what we saw in the last two difficult market periods in 2007-09 and 2000-02.
Finally, Treasury yields are up from their lows … but not by much. They remain far, far from their highs, with the 30-year yielding around 2.7% vs. 3.3% last summer before any of the commotion began.
The U.S. dollar is also rolling over and threatening to break down from a 14-month consolidation/topping pattern. That’s not what you would expect to see if U.S. economic growth was strong and getting stronger, especially relative to the rest of the world.
|“In in other words, safe is sexy.”|
Bottom line: Many of the individual stocks and sectors I’ve named in my Safe Money Report outperformed in the selloff, and they’re continuing to do so in the rally. My hedges are obviously taking some heat. But considering the nature, character, and timing of this rally in the market and economic cycle, I’m extremely wary of jumping on board willy-nilly.
It’s not like we didn’t see this exact same thing happen in September and October, either. The Dow surged 2,100 points back then, almost exactly how much it has rallied off the February low. That rally eventually fizzled out, and my indicators suggest this one is at risk of doing so too.
Now, let me hear your thoughts. Is this another big bear market bounce? Or is it the start of a new bull run? Can you “trust” a rally that’s led by defensive, conservative stocks rather than riskier companies? What investment strategies are you using in this environment? Share your comments below when you get a minute.
In the meantime, several of you commented on the outlook for the economy and currencies in response to recent columns.
Reader Peter said: “I suspect the reason Sanders and Trump are doing well is because the economy is not doing well, regardless of what Washington bureaucrats tell us. I also think the age of cooperation among central banks has morphed into the age of open competition. This regime change cannot be underestimated. So, yes, we are in the late cycle.”
Reader Hank added: “This situation is an avalanche waiting to happen. No one can predict which snowflake or blizzard might trigger it. Thus, I would prefer to have as much knowledge now to better prepare for this event.”
On the question of the U.K. and the British pound, Reader Al said: “The Brits are putting up a good show in order to get more out of the EU. However, there is only a very slim chance the U.K. will actually ‘Brexit.’ The refugee situation brought the possibility of Brexit, yet the Brits are the least affected.”
And Reader John D. I. said: “The EU is a dictatorship of bureaucrats that will eventually lead to a civil war as citizens object. The U.K., in contrast, was a democracy since its civil war, and Brexit is the only way to keep it, although our politicians lie again. If you do not learn from history, you are doomed to repeat it.”
Thank you for sharing. It seems more and more “Black Swan”-style crises are buffeting the markets these days, from Brexit … to wild currency swings … to huge declines and equally vigorous rallies in stocks. It’s all a sign to me, as the Wall Street Journal noted in a story today, that “policy makers are losing the ability to wield control over financial markets.”
If you agree or disagree, or have anything else to add on these topics, make sure you hit up the discussion section and add them to the mix.
Gold reversed to the downside yesterday, and lost a few more dollars earlier today. But it’s still having its best quarterly performance since 1986 – and it’s the top-performing asset in the entire world. Gold ETFs have attracted around $11.7 billion in inflows, which the Financial Times calls the strongest since 2009.
Apple (AAPL) is going small again, according to Bloomberg. The company is going to release a smartphone designed to attract low-end buyers who have previously bought less-robust 5S and 5C models. But overall sales growth has been slowing, and owners have been taking longer to upgrade their phones recently – two challenges that have weighed on Apple shares.
Apparently, consumers aren’t spending as much on high-end jewelry either. Tiffany & Co. (TIF) predicted a first-quarter earnings per share drop of as much as 20%, and another decline of up to 10% next quarter. It blamed slowing profit growth on the uncertain economic environment and currency fluctuations.
So what do you think? Is this bounce back legit, or poised to fail? Is Apple’s cheaper phone going to help ignite sales growth? Are you making money from this rally in gold, and do you think it has further to run? Let me hear about it in the discussion section below.
Until next time,