By Margarita Fernandez
The jolly old elf was a disappointing no-show this year - no Santa rally for stocks. And the New Year isn't off to a very happy start either unless you happen to be holding one of those winning Powerball tickets. In fact, 2015 as a whole was pretty unsatisfying - challenging for investors of all kinds; bonds, stocks, and commodities all suffering varying degrees of pain, markets flummoxing even the greatest of investors.
The media has detailed the painful under-performance of some prominent hedge funds with well-known names such as Bill Ackman's Pershing Square declining 20.5% in 2015. The fund's investment in Valeant Pharma (NYSE:VRX), as it was with so many other funds, the main but far from the only culprit. The clear winners last year were a handful of high growth and well-loved Mega-cap tech stocks, so popular they spawned a new acronym - FANG (Facebook (NASDAQ:FB), Amazon (NASDAQ:AMZN), Netflix (NASDAQ:NFLX), Google (NASDAQ:GOOG) (NASDAQ:GOOGL)). These stocks weren't spared in the recent correction though as investors filed down the FANGs, taking profits where they were available.
Investors are seeing the glass as half empty, with many of 2015's worries carrying over into 2016. China's opaque economy is slowing and government control, over the stock market and the economy, appears to be slipping. Uncertainty over official economic statistics and doubts about the efficacy of policy add to global market jitters. While the US economy is not China dependent, the slowing of the world's second largest economy seems likely to have some repercussions. There is a soft landing scenario for China-based ultimately on the ability of an authoritarian government to implement and enforce policies that can stabilize the economy. We have seen some of these already with questionable outcomes - the devaluation of the yuan and seemingly over-tight stock market controls.
Oil prices continued their slide this month, with West Texas Intermediate briefly dipping below $30 a barrel on January 12th and again this Friday, the first time oil has fallen below $30 since 2003. The free falling commodity and the pummeling of China's stock market has heightened investor fears and played an important part in the day-to-day volatility we are witnessing in financial markets. Emerging economies have been particularly punished due to their large exposure to declining commodity prices and China. Although not as central as in the past (at least it feels that way), geopolitical tensions and terrorist activities have added to investors' fears.
In the glass is half full category is a U.S. economy that continues to chug along in "new normal" fashion. Employers continue to add jobs (mainly in the services sectors), consumer confidence has increased (December was up to 96.5 from November's 92.6), the auto industry continues to have strong demand (recalls and legal troubles notwithstanding) and housing continues to strengthen in most areas. Interest rates are still historically low, never mind that 25 basis point hike - no worries, cheap money is still available to those companies deemed creditworthy. That category has been shrinking, however, as the list of companies downgraded or placed on negative credit watch grows by the day.
And so, as we enter the New Year, fourth quarter earnings season is upon us and we wait to see if, as projected, it will be the third consecutive quarter of earnings contraction and the fourth quarter of revenue declines. FactSet notes that at the start of 2015, analysts were forecasting fairly strong earnings (+7.4%) and revenue (+2.7%) growth for S&P 500 companies. The current expectation is for a 0.7% decline in 2015 earnings versus 2014 and a 3.4% decrease in revenues for the S&P 500.
For the fourth quarter, the estimated earnings change according to FactSet compilations is now at a -5.3% and -3.3% for revenues. Net profit margins are projected at 9.9% versus the 10.4% reported for the previous two quarters. The main culprits - or excuses as the case may be - are the strong dollar and collapsing oil prices (for some). The unseasonably warm winter weather and higher wages - for companies that have succumbed to political pressure - will likely have adversely affected some retailers in the U.S.
As always, we look to the companies to provide guidance about their businesses. The fourth quarter is in the rearview mirror but what is up ahead? Our equity investment selection process begins with a quantitative screen. One of those screens has a strong earnings revision factor and we have noted that on a week-to-week basis, the list has grown slightly shorter and even companies in the top quintile for positive earnings revisions are seeing their estimates for 2016 trimmed.
The S&P 500 had a total return of +1.38% in 2015, entirely from income; the price change for the index was actually -0.73%. What the market giveth, it can also taketh away. Keep your eyes on the horizon - where will we be one year, two years, and ten years out? Short-term volatility is just that. Keeping a long-term perspective will allow for objective analysis of your investments as they relate to your personal objectives. What sectors/companies will be able to navigate well and continue to grow in this environment? Which are the market leaders in their industry? Where is the value? Do the companies in your portfolio have a manageable level of debt? As always dividends will be an important and stable part of your total return.
So, let's see what the companies have to say in the next few weeks. As always, there will be winners and losers, (we have already seen a few of each) and their recaps of the most recent quarter and commentaries regarding their outlook will be of import to the direction of the financial markets.