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Financial Market Fear: 2016 Isn’t Off To As Rough A Start As You May Think

Financial Market Fear: 2016 Isn’t Off To As Rough A Start As You May Think

Just a week into 2016, and the market is off to a difficult start. If it feels like déjà vu, it is. Chinese market volatility has once again reared its ugly head and is causing anxiety in the U.S. markets. As of Thursday’s close, the S&P 500 is down 10% from its May highs. While we don’t want to dismiss the turmoil, it is worth noting not much has changed from August. Meaning the economy continues to chug along and stock valuations are fair.

What’s different this time? First, oil continues to make new lows. Second, the Federal Reserve raised rates 0.25% in December. Let’s address both.

Oil prices are still low. Lower oil prices provide a tailwind for consumer spending, which accounts for 70% of U.S. GDP, and very rarely (arguably never) lead to recessions. The other piece of good news is oil’s decline has stemmed from oversupply and not lack of demand. Lack of demand sends worrying economic signs, not too much supply.

The Fed’s rate hike. Federal Reserve inaction/action over the past few years has produced market volatility. We expect this to continue, unfortunately. On the plus side, we also expect the Fed to move very slowly compared to prior cycles. This means while rates could rise over the next 12-24 months, our base case calls for a slow ascent and that the overall environment will remain accommodative.  

What’s the same this time? The U.S. economy remains on solid footing. Though we readily admit it’s acting more like the tortoise than the hare. GDP is growing in the 2.0%-2.5% range and is likely to do so again in 2016, disposable income has accelerated to near 4%, unemployment remains low fueled by solid job growth and the housing market is improving. These factors all pointing in the right direction lead us to the same conclusion from last time: a recession looks unlikely over the next 12-18 months.

The start to 2016 is not a welcome one, to be sure, but we think it has more elements of fear than fundamental merits. As always, we believe strongly that a balanced portfolio is key and are here to help.


 

Restaurants, Gas Prices Help Ease Unemployment

Have you ever worked in a restaurant? You’re in good company – almost 50 percent of Americans have worked in the restaurant industry at some point in their lives. In 2014, there were around 13.1 million Americans working in the restaurant industry according to restaurant.org, and that number is expected to increase 9.8 percent to 14.4 million by 2023.

To put those numbers in perspective, restaurants employ about 10 percent of the entire U.S. workforce, and it’s no surprise considering that this industry has a low barrier to entry and can be found just about everywhere. Even during the Great Recession, the restaurant industry weathered the downturn better than other sectors and reached pre-recession job levels by 2010.

With restaurant employment steadily on the rise, it’s impossible to not give some credit to the industry for helping the US finally reach weekly jobless claims of just 265,000 for the week ending January 24. That’s the lowest claims level since April 15, 2000 when it was 259,000.

In my view, lower gas prices may continue driving some of this employment expansion in the restaurant industry. CNBC recently released a story with research showing exactly where people are spending their gas savings. The number one area is restaurants. “Our data shows overall spending is up, consistent with our improving economy,” said Kasey Byrne, chief marketing officer for Cardlytics.

Spending at restaurants is growing pretty much across the board, but the restaurants with the most growth weren’t the fancy ones. Instead it was the quick service restaurants, otherwise known as fast food.

While CNBC has labeled fast food the winner, I have to wonder if it’s really fast casual that’s taking the lead. Over the last few years, as the economy has continued to strengthen, we’ve seen people moving away from fast food (McDonald’s) in favor of fast casual (Chipotle). The trend is making waves – McDonald’s recently reported another bad quarter for sales and promptly announced that they were changing CEOs.

There is a lot of speculation right now as to how McDonalds and fast food in general will handle the move from “yummy” to “yoga” (milkshakes to kale smoothies, hearty to healthy, fast to fresh) that Americans seem to be embracing. It seems clear to me, though, that while Americans are saving money at the gas pump, they’re also pumping those savings into higher quality restaurants in their community, and in turn supporting employment.

After all this food talk, I’m now hungry.

Tweet me your favorite restaurant or a place you think I should try @WesMoss365!

 

Read the original article here.


 

Is Cheap Gas a Good Thing?

While the stock market has been making new highs over the last few weeks, there is one sector that continues to drop… dare I say plummet!

In June, a barrel of oil cost $107, today (less than six months later) we are at $66 per barrel. That’s a drop of 38 percent.
This has certainly had a positive impact for us at the pump. Nationally, gas is at $2.72 while Georgia has an average of $2.65… and falling. To put that in perspective, in June, Atlantans were playing closer to $3.70!

This is wonderful for you and me as we are able to enjoy this drop in price when we’re filling up our cars… but what about the rest of the US economy?

Energy stocks have hit a brick wall. While many energy sector stocks were up around +15 percent this summer, they’re now looking at a minus 10 percent return for the year.

There are several reasons why we have seen oil prices drop since the summer. First, there has been lighter demand growth around the globe for oil. China and Europe’s slower economies haven’t been as demanding of “black gold” as they face slower growth in 2014. Second, there is a persistently higher supply right now due to new drilling technology, tremendous amounts of new oil supply found right here in America, and the Middle East oil power houses having decided to keep their output supply as-is.

In a much anticipated announcement on Thanksgiving Day, OPEC (Organization of the Petroleum Exporting Countries) decided not to cut their production targets. They, of course, could have chosen to stabilize the price by producing and exporting fewer barrels of oil per day… but that’s not how it played out. Why would they do this?

There are oil producers/competitors all over the world that can’t survive with oil prices much lower than they are today. The US’s new oil producers represent some of that contingency and there are many other international producers likely to decide to shut down higher cost oil exploration, as well.

Ultimately, I think the countries in OPEC (especially Saudi Arabia) are flexing their muscles in an effort to reassert themselves back into the director’s chair. Unfortunately for the Saudis, though, I just don’t see this playing out in the long run. They are just too dependent on their one trick economy. On top of that, low gas prices are good news for consumers and businesses here in the US.

Let’s circle back to the original question; are low oil prices bad for our economy? Is it bad for oil dependent companies?

Of course it is, at least in the short term. However, the major US oil companies have plans in place for situations just like this and are likely set to ride out this drop in prices. In the meantime, economic growth for the third quarter was actually revised up from 3.5 to 3.9 percent. That’s almost 4 percent growth! It’s easy to see where this comes from, as well.

For every $1 per gallon drop in prices at the pump, you and I are going to save about $1,000 a year on gas. Just think about how big a dent that is for a family bringing in $50,000 a year?! That extra money is going to get spent somewhere, whether it’s Target, Amazon, Delta, or even a neighborhood shop.

This is exactly why we have seen stocks for airline companies, retailers, and hotels rally as oil prices have dropped. It’s not just these guys that win when the cost of oil and gas goes down, though. Transportation actually gets a huge lift. UPS and FedEx rallied on the oil price drop, as well. The chemical industry, groups producing plastics, rubber, asphalt, paint and more, also saw an increase in value. Even agriculture got a bump.

While OPEC drops the price of oil around the globe, leveraged oil companies (the ones with the most debt) are no doubt feeling the pain. US oil stocks also get hurt (i.e. the recent pain we’ve seen in the stock market). However, while OPEC plays the waiting game with their competition, the US consumer economy should be getting a huge boost!

The energy sector makes up less than 10 percent of the S&P 500, so a fraction of the overall market is getting hurt. Meanwhile, many of the other nine sectors in the S&P (and don’t forget you and me) are likely getting a little relief .

Bottom Line
Could this take out some of the most marginal, border-line energy companies across the globe? Yes. Could this dip hurt the junk bond market? To some extent, yes. However, the way I see it, for now the good outweighs the bad when it comes to low energy prices.

Read the original article here.


 

Ebola and the Economy

Just last week I did a quick 24-hour round trip from Atlanta to New York City. Thursday was the first day that a case of Ebola was reported in New York.  Friday morning I tweeted a selfie “warm NY welcome photo” of me holding a copy of the New York Post with the headline “Ebola Here!”

Nerves will certainly continue about Ebola’s potential impact but so far here are the real effects that I’ve been able to measure:

So far, no impact on economic activity. Last week in New York my hotel was completely booked, both of my Delta flights were completely full, and New York City despite the past several weeks of Ebola news including Thursday’s reported case was as bustling as I’ve ever seen it. According to NYC & Co. (NY’s official tourism group) occupancy at hotels is still close to 90 percent. Those numbers were as low at 65 percent following the 9-11 terrorist attacks. Restaurants are still packed, flights still seem full, and the economy appears to be completely resilient to the threat.

However, the stock market has proven to be much more sensitive. Despite a strong week last week in the market, from mid-September to mid-October travel and hospitality related stocks suffered tremendously, even compared to the overall stock market decline we saw. From mid-September until mid-October the broad S&P 500 dropped about 9 percent at its worst measurement. However, travel and hospitality stocks fared far worse. Delta at one point was down nearly 25 percent, Southwest nearly 18 percent, Intercontinental Hotels 15 percent, and Royal Caribbean cruises down nearly 20 percent.

A very real impact for stocks, while the actually economic activity is seeming unscathed. Remember, fear of what could happen is usually much scarier than what will happen.  I want to remind you of this as you will continue to hear more about Ebola, and see continued sensationalism around the topic.

I personally sometimes get challenged for my lack of sensationalism and pessimism. When I talked about the Perfection Misconception a few weeks ago and the fact that we are not in a recession anymore and have not been since 2009 (which 72 percent of people in the US apparently didn’t even realize), I actually received emails, phone calls and online comments saying that I was crazy to say the economy is in good shape. Here’s the thing, though; I’m looking at facts. After looking at economic data points day after day, year after year and watching the stock market rise nearly 200 percent over the last five and a half years it’s difficult for me not to be optimistic about the economic repair we have experienced since 2009.

I think it’s time that we look at those cold hard facts, and take a step away from the pessimism of the media to really evaluate the risk of Ebola in the US. I’m clearly not a doctor, but from everything that I have read and researched, Ebola is only transferable through blood or bodily fluid and is not the kind of disease that would spread rapidly in the US.   However, almost every article you read about Ebola seems to include a small,almost innocent side note that goes something like, “Ebola is a tragedy and terrible and scary but it really shouldn’t be a problem for us here in the US…unless it becomes airborne and spreads.”

When a reporter or an economist gives their “disclaimer” about how bad things could get if Ebola becomes “airborne” they make you pause and question just how likely that is to happen. Could Ebola suddenly mutate and spread through the air like in the Dustin Hoffman and Rene Russo movie Outbreak? Does the author of the article know something that we don’t know?

The answer is no.  The reporter very likely doesn’t have some super secret knowledge on this disease that has not already been shared with us. It’s similar to the reporter saying, “You’re safe to sleep in your own home and your own bed tonight…unless you get swallowed by a sink hole that’s possibly lurking under your house.” Wait a minute; does the reporter know something that I don’t know?  When you hear this disclaimer, you might get scared into thinking, “Should I be worried about a sinkhole under my house?” Sound familiar when reading articles and disclaimers about Ebola “going airborne”?

An American man was killed a few weeks ago by a camel on a beach in Mexico. When you hear about Mexico now, you probably aren’t hearing a warning to stay away from camels. That’s because even though a guy was killed by one there recently, it’s still so unlikely that people aren’t disclaiming a spread of kicking camels in Mexico.

It’s important to remember that anything could happen, whether it’s the stock market crashing, a sink hole appearing under your house, a camel killing you on a Mexican beach, or Ebola even becoming airborne. Just because it could happen doesn’t mean it will, so don’t let media disclaimers, pessimism, or sensationalism scare you into quarantining yourself from the world.   It’s better for your mental health and your wallet in all these situations to remember the Perfection Misconception, and not let these possibilities dominate your life.

 

Read the original article here.


 

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