We said at the start of the week that one of the only reasons to be positive on equities was sentiment; the underlying case was less clear. So it’s proving as equity markets continue the dreadful start to the year. Once again China appears the catalyst for falls around the globe, but we do not believe China worries are the root cause. The root cause, in our opinion, is concerns the Federal Reserve has mistimed the start of the rate hike cycle. Chinese equity markets and the strength of the Chinese economy are only loosely correlated, in our opinion.
Wednesday evening the minutes from Federal Reserve meeting that led to the rate rise were released. The minutes revealed a unanimous vote to raise rates, as it had to be. Despite several members of the committee affirming their view that this move will lead to further moves this year, serious question marks must remain whether this will indeed be the case.
The minutes revealed that several members expressed concerns that inflation will remain below the target of 2%. They also expressed concerns that the continuation of a monetary tightening policy would indeed impact growth. As we have also pointed out economic growth data has been weaker than expected recently. According to the Wall Street Journal, macro economic advisors have lowered annualized out put gain in the fourth quarter from 2% to less than 1%.
The FANG index, comprising of Facebook, Amazon, Netflix and Google is the latest of the negative indicators market analysts highlighting. These four stocks were responsible for the bulk of the S&P 500 performance last year. As opposed to last year, these stocks are also falling at the start of this year, along with everything else. Other cautious signs for the broader indexes are the weakness in the transport index, which has fallen 20% from its highs. The Russell 2000 index of smaller companies is down 14% from its highs. One ray of sunshine in an otherwise cloudy horizon is the slight recovery at the start of the year of high yield credit.
Allegedly a good first week in January bodes well for a good year, a bad week has little statistical evidence for what lies ahead. A bad January overall is statistically not so good for the year ahead. This time last year started on similar lines to 2015, when the S&P lot 3% in the first month, the Dow Jones about 5%. So far this is the worst January for US markets since records began.
The Ftse 100 at one point has fallen nearly 8% from the start of the year, the S&P 500 over 5%, the Dax index of leading German companies, likewise 8%. If sentiment was bearish at the start of the week, it is now a lot more so now. John Authers wrote in Saturday’s FT that a flat year, rather like last year may be the best investors can hope for, some investors would take that now.