Stimulus Squared - The Fed Has Done One Of These 3 Things:

by: William Stanley

Summary

A. Saved the world from recession and put the economy on course for economic growth?

B. Distorted the course of natural market activity for a more dramatic future reckoning?

C. Put us on course for stagflation, low returns and high volatility?

In December, we opined that equities markets were overvalued and suggested that the slow pace of global growth and struggling energy industries would cause a market sell-off and potentially push the U.S. into a recession.

After dropping 10.5% by February, the S&P 500 recovered these losses by mid-March with many of the most beaten down Sectors: Energy and Commodity stocks leading the way. Currently, we believe that recessionary concerns have abated and offer the following regarding future market directions and opportunities for investors. Why the change?

We underestimated the lengths that Central Banks, including our own, would go to prop up their country's economies and the massive amounts of stimulus they stood willing to inject:

U.S. Fed Reserve Board:

  • Announced that negative Interest Rates for the U.S. "are not off the table"
  • Signaled on Mar. 29 that interest rate hikes in 2016 are to be considered cautiously

Note: Denmark, Sweden, Switzerland and Japan have negative interest rates

The European Central Bank:

  • Reduced the rate on overnight bank deposits to minus 0.4 percent
  • Increased monthly bond purchases from $60 to $80 billion Euros
  • Will provide long-term loans to banks beginning in June
  • May pay banks to borrow money in the future

Peoples Bank of China:

  • China's central bank injected CNY 100 billion ($15.2 bil.) in reverse repos on Feb. 2

Market observers question whether these actions have:

  1. Saved the world from recession and put the economy on course for economic growth?
  2. Distorted the course of natural market activity for a more dramatic future reckoning?
  3. Put us on course for stagflation, low returns and high volatility?

Nevertheless, despite central bank interventions, Economic Data remains mixed and markets appear to be in a general malaise.

The Good

Oil rebounded from $30 per barrel in January to $39 in March driven by: a) An implied agreement amongst OPEC and non-OPEC producers to limit production; b) Significant decline in domestic Drilling Rigs leading to expected future declines in U.S. production growth

Emerging Markets rebounded and have outperformed Developed Markets (+2.3% vs. -1.3% using MSCI indices)

U.S. employment growth remains steady with the three-month average of non-farm payroll growth through February at 238K and 242K over the past 24 months

Q4 2015 GDP revised from .7% to 1.4% with the consumption component rising 2.4% to offset a negative manufacturing read (Assuming 1.4% Growth is considered positive)

The US Dollar weakened against the Euro, Yen and Renminbi, thereby decreasing the cost for U.S. exported goods and services

The Bad

Durable goods fell 2.8% in February, the 3rd decline in four months

Profits of U.S. Companies fell 7.8% in Q4 2015 and 11.5% overall in 2015. However this included a $21 Billion settlement of the Gulf oil spill and the impact of energy sector declines

Global Shipping Volums are forecasted to grow 0% - 1% by some of the major shipping and logistics operators in 2016

Recent reports indicate that Subprime car loans have fueled a portion of the auto recovery and delinquencies are at extremely high rates

Some forecasts suggest that 50% of U.S. Oil Exploration Companies will file for bankruptcy

The Dilemma

Raising U.S. interest rates could upset a fragile recovery by strengthening the dollar and causing outflows of capital form Europe, China and Emerging markets, pushing them into recession.

Thus, investors should expect periods of volatility followed by range bound trading and should utilize swings to selectively: ((i)) acquire stocks that have overshot on the downside, and (ii) sell into rallies on the upside.

The preceding represents the views and opinions of The Stanley-Laman Group, Ltd., a Registered Investment Advisor, and is not intended to be investment advice suitable for all investment objectives. Investment strategies involve the risk of loss of principal. Investors are advised to consult with qualified investment professionals relative to their individual circumstance and objectives.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.