The 2016 Market Megathread

[Potus]

Energy demand is falling through the floor. China is in trouble. Retailers are in retreat. The market is being schizophrenic with large lurches in either direction with a general downward trend.

What do you all think is happening? Causes? Effects?

[jaichind]

Unless there is a market rebound soon, these types of drops tends to indicate that a recession is around the corner.

[Seneca]

Demand is coming back down to earth. Since 2008, demand has been brought forward by incredibly easy monetary policy. Easy credit led to speculative investments of which China's ghost cities are the poster children, but much of US shale production has only been made possible by historically cheap credit. The past seven years are a bubble, and all bubbles must burst. China, the global economy's engine, has finally slowed down, and with China goes the world. Right now China is exporting deflation across the globe, as the US did in 1930. We're in for a hard landing of our own.

As far as effects go, expect the carnage in the energy sector to really pick up this spring. Oil & gas inventories tend to peak around April, meaning the oversupply issue will likely peak in the next two to three months. Unless something changes, oil may temporarily fall below $10 as oil supply centers become overfilled. Also on April 1 banks reevaluate the credit lines they've extended to energy companies, many of which are almost certain to have their borrowing restricted. Most shale companies run at a loss. Therefore, we can expect the rash of energy bankruptcies to really gain steam after April 1. By the summer, the breadth of the crisis will become clear as local banks in shale producing regions begin to go belly up. By September we may have a second Lehman moment exactly 8 years later. You might be surprised at the extant to which large banks are exposed to US energy. That was, after all, the sector that was supposed to save the US from its "secular stagnation."

[Türkisblau]

muh stocks today...

[Potus]

Yeah, today wasn't good.

This retail situation has me a bit concerned. I realize how rudimentary this is, but shouldn't such a huge drop in gas prices correspond with a surge in consumer spending at retailers? It's not like savings are booming. I've not heard of mass payoff of consumer debt. The market is on its way down so they aren't investing it. Where is the money? How can Walmart and Macy's not make it in that environment?

[DC Al Fine]

Yeah, today wasn't good.

This retail situation has me a bit concerned. I realize how rudimentary this is, but shouldn't such a huge drop in gas prices correspond with a surge in consumer spending at retailers? It's not like savings are booming. I've not heard of mass payoff of consumer debt. The market is on its way down so they aren't investing it. Where is the money? How can Walmart and Macy's not make it in that environment?

There's two questions at play here:

1) What effect will X have on Y?
2) Is X already accounted for in the price of Y?

You seem to be confusing the two.

Let's use an oil producer as an example. Everyone knows what changes in the price of oil do for an oil producer. Investors buy or sell shares in oil companies with an expectation of future oil prices. Therefore, changes in the price of oil should only affect the price of an oil stock, only to the extent that they diverge from expectations.

Suppose every investor in the world expected oil to drop to $1/barrel in a year. If oil was $1/barrel in a year, we wouldn't expect a change in the price of oil stocks all else equal. Why? Because investors expected it to happen and shares traded on the expectation of $1 oil, and reduced earnings for oil companies.

Using you're Walmart example, the relevant question isn't what oil will do for Walmart, it is what oil will do for Walmart relative to expectations. This is a fool's game to play. Very few do it well.

If you are planning on investing, you are much better off picking a buy and hold strategy and sticking to it, than trying to beat the market based on economic indicators.

[DINGO Joe]

I do some market timing and do have some cash on the sidelines with a rough target of Dow 15,000 (or S&P 1750-1800)  I thought we were gonna get that last fall, but didn't.

I was under the impression that both consumer debt has declined considerably over the last several years and the savings rate has climb as of late.

[Sprouts Farmers Market ✘]

If you are planning on investing, you are much better off picking a buy and hold strategy and sticking to it, than trying to beat the market based on economic indicators.

Sector rotation has been proven to beat the market consistently. Buy and hold is better than buying and selling without reinvestment of course.

[DC Al Fine]

If you are planning on investing, you are much better off picking a buy and hold strategy and sticking to it, than trying to beat the market based on economic indicators.

Sector rotation has been proven to beat the market consistently. Buy and hold is better than buying and selling without reinvestment of course.

Citation needed. NAVFX for example is one of the standard bearers of this strategy and managed to vastly underperform the S&P 500 over the past 5 years.

Tactical allocation strategies simply don't produce alpha. They are the result of taking on more risk at best, and data mining at worst. I could beat the market over the long run by investing in small caps but that doesn't make me a skilled investor, just an aggressive one.

Furthermore if this strategy actually did produce alpha, why haven't money managers arbitraged it all away?

[Sprouts Farmers Market ✘]

If you are planning on investing, you are much better off picking a buy and hold strategy and sticking to it, than trying to beat the market based on economic indicators.

Sector rotation has been proven to beat the market consistently. Buy and hold is better than buying and selling without reinvestment of course.

Citation needed. NAVFX for example is one of the standard bearers of this strategy and managed to vastly underperform the S&P 500 over the past 5 years.

Tactical allocation strategies simply don't produce alpha. They are the result of taking on more risk at best, and data mining at worst. I could beat the market over the long run by investing in small caps but that doesn't make me a skilled investor, just an aggressive one.

Furthermore if this strategy actually did produce alpha, why haven't money managers arbitraged it all away?

I can absolutely assure you it is not more risk; in fact, this is on a more stringent risk-adjusted basis than firms adhere to. It hasn't been arbitraged away because markets are inefficient. Citations are almost certainly behind a paywall, but I'll look for them tonight if I have time. A couple do use data mining - why are you opposed to that? Because it can be easily eliminated by investors who follow these as instructions? Reading the economy is half the problem for them, and most are not particularly good at it. The results hold into the future for those who are quite good, and they are smart enough not to publicize their views.

[Torie]

DC Al Fine PM'ed me about this issue, so I thought I would drop by and give my two cents.

Sector rotation is about a momentum strategy typically. There is some market inefficiency when it comes to momentum, but whatever alpha is out there is typically more than offset by transaction costs. A more pronounced inefficiency is that value stocks seem to have a higher rate of expected return given the risk usually. Thaler and other behaviorists think that is attributed to the casino mentality, the reason folks by lottery tickets. They are willing to pay for having a chance to get in early on the next Microsoft or Apple or whatever. And once in awhile, speculative energies seem to cause the market to get mis-priced, and way overvalued given expected return, with either a zero or negative expected equity premium.

Myself, I just buy and hold, with a value skew, and do nothing except when the market gets way overvalued, and then I pare down on my equity slice. When the market got way overvalued, say around 2000 or whenever it was, I cut my equity allocation over time down to about 20%. Now it is around 50% or so. I have a somewhat higher equity allocation than normal for my age, because I own so much residential real estate, which in some ways is akin to owning TIPS, or treasury inflation indexed bonds, albeit with more risk, but more favorable tax treatment, and generates a pretty good and reasonably stable cash flow.

I hope that helps. I have not updated myself on all of this in about 5 years, so maybe the research has had no insights, but I strongly doubt it.

I wonder if "Dunn's Law" is still used out there.

[Sprouts Farmers Market ✘]

Oh my gosh, I seriously just looked Dunn's Law like it was a huge thing I'd never heard of. Shoot me.

[Ban my account ffs!]

Demand is coming back down to earth. Since 2008, demand has been brought forward by incredibly easy monetary policy. Easy credit led to speculative investments of which China's ghost cities are the poster children, but much of US shale production has only been made possible by historically cheap credit. The past seven years are a bubble, and all bubbles must burst. China, the global economy's engine, has finally slowed down, and with China goes the world. Right now China is exporting deflation across the globe, as the US did in 1930. We're in for a hard landing of our own.

As far as effects go, expect the carnage in the energy sector to really pick up this spring. Oil & gas inventories tend to peak around April, meaning the oversupply issue will likely peak in the next two to three months. Unless something changes, oil may temporarily fall below $10 as oil supply centers become overfilled. Also on April 1 banks reevaluate the credit lines they've extended to energy companies, many of which are almost certain to have their borrowing restricted. Most shale companies run at a loss. Therefore, we can expect the rash of energy bankruptcies to really gain steam after April 1. By the summer, the breadth of the crisis will become clear as local banks in shale producing regions begin to go belly up. By September we may have a second Lehman moment exactly 8 years later. You might be surprised at the extant to which large banks are exposed to US energy. That was, after all, the sector that was supposed to save the US from its "secular stagnation."

I think this is pretty good analysis even though I have to admit I have a tendency to be chicken little...

Our economy and especially our markets and business planning are based on perpetual growth.  This just isn't possible in so many places anymore (All of Europe, Japan, South Korea, and soon China) with stagnating or declining populations.  While China is still growing, all of that growth is among the elderly while the younger, more economically active people are seeing their numbers stagnate and decline.

A global recession seems all but inevitable now.  And this time the economic downturn will REALLY hurt.. much like the 1937/38 recession in the U.S.

I fear what will happen if the U.S. goes through a crisis.  It'll be president Trump and we are seriously f**ked.

[OSR stands with Israel]

Stocks have gone up another 200 points today. Remember stocks were lower in August of 2015 then now and they fell over 1000 points in two days then and the stock market rebounded, so I dont think its time to panic yet.

[Clarko95 📚💰📈]

I was under the impression that both consumer debt has declined considerably over the last several years and the savings rate has climb as of late.

Indeed it has. Average household debt as a percentage of  household income is back down to about 90%, which is the same level it was in 2000 and down from a peak of 113% in 2007. Savings rates went back to a healthy 5% of income from 2009-2013, and IIRC it went down to 3% or so in 2014 (not a sign of reckless spending).

Though we Americans are still very much addicted to debt and debt-fueled booms, we are nowhere near the critical levels of 2007-2008.

[Clarko95 📚💰📈]

http://www.nasdaq.com/article/chinas-forex-reserves-plunge-to-morethanthreeyear-low-20160207-00023

If anyone cares, China burned through another $100 billion in foreign exchance reserves last month after a $108 billion drop in December (total currency reserve decrease from China is officially reported at $512 billion for all of 2015).


They still have over $3.3 trillion in the bank, which gives them time to figure out what to do before they hit the $2 trillion mark (a limit they determine crossing would trigger unsustainable capital flight).


So there's that.

[Seneca]

Can someone explain what the hell is going on with the Nasdaq? It's doing even worse than the NYSE.

The tech bubble is bursting.

[Ebsy]

It's not that surprising that tech companies that routinely fail to make profits aren't actually worth countless billiions of dollars.

[Seneca]

It's not that surprising that tech companies that routinely fail to make profits aren't actually worth countless billiions of dollars.

Very true. Unfortunately, countless money managers don't seem to understand that. Hopefully this bust is relatively contained, but the way funds, banks, and others have been chasing returns in this low growth environment is a cause for concern, IMO.