The Market in Review
Paul Siluch, Lisa Hill, Peter Mazzoni, and Sharon Mitchell
Financial Advisors
Raymond James Ltd. – Victoria BC
April 1st, 2016
This week’s articles and insights
1. Who’s The Fool?
2. Calmer Waters
3. The Bond Bogeyman
4. Loonie takes Flight
5. Virtual Reality
“Christmas is the time when kids tell Santa what they want and adults
pay for it. Deficits are when adults tell government what they want
and their kids pay for it.”
-
Richard Lamm
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Today is April Fool’s Day, an odd celebration with a murky past. There are
several explanations as to why we try to make fools of people on this day.
One explanation had to do with the adoption of the Gregorian Calendar in 1582.
The date for Easter had been wandering around for centuries thanks to an
incorrect Leap Year calculation, so the new calendar kept it in a much smaller
range. It also officially moved New Year’s Day to January 1st from April 1st.
However, many people either refused to accept the new date, or did not get the
royal memo. When they continued to celebrate New Year's Day on April 1, others
made fun of them by sending them on "fool's errands." The hilarity eventually
spread all across Europe.
April Fool’s Day may be even older than this, however. The Romans had a
festival named Hilaria on March 25, which was the first celebration following the
vernal equinox, when days became longer than nights. People were allowed to
imitate anyone they liked, making it one of the most lighthearted celebrations of
the Roman year (source Infoplease.com).
Stock markets in 2016 have succeeded in making fools of most market timers.
After the worst start to a new year in decades, with global markets declining over
-11% in just the first two months of the year, stocks have come roaring back to
cut those losses almost in half. Many market-timing services issued strong “Sell”
recommendations when things were at their worst in February, only to switch to
“Buy” this week.
November through April has traditionally been the strongest period for stocks
each year. This means it is not a complete surprise that equities have recovered
after their winter swoon.
A bigger concern has been the similarity of today’s market to those of 2001 and
2008. Both “rolled over” to much lower levels.
The “rolling over” pattern has been halted, for now:
One note of optimism we should point out is the rapid expansion in breadth in the
last month. Far more stocks are participating in the rise than we saw for many
months, indicating rising interest by investors and perhaps rising profits to come
from the companies themselves.
May is often when stock markets dip again, as they did in 2010, 2011, 2012, and
2015. We will see then who the fools are – today’s buyers or today’s sellers?
Calmer Waters
As mentioned, stock markets have been strong this month. This was a welcome
relief from the harsh returns we endured in January and February.
What changed? There is an old saying “You can’t fight the Fed”. Stocks don’t like
rising interest rates. In March, and especially this week, the US Federal Reserve
slowed its talk of interest rate hikes. Janet Yellen looked at the economic
landscape and saw enough economic headwinds to get a little more cautious.
In particular, world growth is still sluggish. Layoffs are increasing in the USA, and
the overall U.S. economy (manufacturing, services) has hit a soft patch. Growth
in the first quarter of 2016 was expected to be 1.4% annualized. Instead, it
limped in at 0.6%. Note the slide in the GDPNow forecast from the Atlanta Fed –
one of the member banks of the US Federal Reserve:
Interest rates are now forecast to rise at a much slower pace in 2016, something
stocks definitely liked.
Globally, employment has improved in Europe and a stabilizing oil price is
calming markets in many oil-producing nations. Ideally, we return to a not-too-hot
and not-too-cold economic environment. The Fed’s actions are encouraging.
The Bond Bogeyman
One of the biggest fears among investors has been “what if interest rates rise
suddenly?” Rates are at their lowest levels in decades in North America, and are
at their lowest levels in history in Europe.
The odds are, low rates will be with us for some time to come.
Interest rates move in long cycles. The last time we saw interest rates stay this
low was from 1934 to 1955, when the US 10-year bond fell below 3% and stayed
there for 21 years. This was a result of too much debt generated in the 1920s, an
aging population (fewer babies were born during the Depression), and a slow
world economy. Sound familiar?
Governments today handled the crisis of 2008-2009 better than they did in 1932.
Finance ministers kept the banking system solvent by propping up the banks until
they could stand on their own. But in similar global slowdowns after financial
crises, the period of low interest rates was measured not in months, but decades.
In fact, the average is about 20 years.
The graph below shows how this could play out, with long-term bonds not rising
above 3% consistently until the late 2020’s. At the heart of everything is too much
debt. Governments have forced interest rates down, which has made that debt
manageable. But until we pay it down, default on it, or inflate it away, global
growth is likely to stay low.
It makes our job as advisors that much harder for those who need income. And
with an aging population, that includes just about everyone.
Loonie Takes Flight
While many Canadians watch their stocks closely, even more watch our currency
and how it moves against the US dollar. The exchange rate affects cross-border
shopping, vacations, and even food prices, so it is a big deal.
The Canadian economy turned in a better performance this January than was
expected – the best monthly growth in three years. Perhaps it was a resurgence
in our manufacturing, which tends to prefer a cheaper currency since it spurs
exports, or it may be just a blip that reverses itself.
The main driver of our currency has been oil prices, as shown in the chart below.
We continue to believe the Canadian currency will trade in a range of US $0.72
to $0.78 for the foreseeable future. Our economy cannot grow much faster than
the world economy, which is stuck in low gear at present.
So, we watch oil prices. The surprise to all of us would be a higher trend, spurred
by tumbling production. So much future production has been curtailed that a
shortage could come back to bite us in a few years. For now, there is little
evidence of any oil shortage. Just the opposite, in fact. Expect the Canadian
dollar to take a breather after its recent jump.
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Just call us at (250) 405-217 and we’ll take it from there.
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Virtual Reality
In the 1980s, the biggest technological wave was word processing on desktop
computers. The 1990s brought us the internet, e-mail, and laptops. The 2000’s
ushered in cell-phones, which evolved into smartphones. There have since been
minor innovations, such as Wi-Fi wireless, solid state storage (like memory
sticks), and flat screen displays. But even with all these, we are pretty much
doing the same things in the same ways as we did a decade ago. Just much
faster.
The next Big Thing may be upon us. Ever since the Viewmaster was introduced
in 1939, allowing stereoscopic viewing of pictures, people have been fascinated
with the concept of simulations. Long a staple of science fiction, Virtual Reality –
or Computer Simulated Reality - is the technological equivalent of the fantasy
world. You can see and experience just about anything from an enclosed
headset, allowing full 3D immersion in games and enhanced reality. Rather than
typing in commands to our computers in the future, we may don a headset and
wave our hands to execute commands (or enemies). Traditional TV may go away
in favour of private headsets, as could movie theatres. What was science fiction
may finally be poised to become science fact.
Estimates from Goldman Sachs suggest Virtual Reality could expand from a $5
billion market in 2018 to as much as $180 billion by 2025. Of course, many said
the same thing about the electric car market, and that has taken far longer to
launch than first expected. And just because you are the first to market does not
mean you will finish first. Just ask the Duryea brothers, who invented the first
American automobile in 1893.
The early leaders in today’s Virtual Reality race are the following:
Facebook (NASDAQ FB) – focused on the high end with its $599 Oculus Rift
product.
Sony (NYSE SNE) – hopes to lead the gaming community by tying VR to its
PlayStation gaming system.
Alphabet (Google NASDAQ GOOGL) – Google is offering “Cardboard”, an
inexpensive box that you put your smartphone into, along with some special
software. Like Google did with its free Android operating system, they are almost
giving this inexpensive VR device away to get people hooked for little money.
Google wants your data, remember, something they will happily gather while you
play with their almost-free toys.
Microsoft (NASDAQ MSFT) – Microsoft is playing its cards close to its chest, for
now, as it addresses the VR market from a different angle. Its product is called
the HoloLens and its focus is something called Augmented Reality. Think of
animation blended with reality, where you can see a conceptual home renovation
overlaid with your existing home, in real-time as you walk around your house.
The student in this picture is studying a galaxy, and is able to turn it, move it
around, and find data by pointing.
We are keeping an eye on this market to see who emerges on top. There are
going to be many players, from chip designers to specialized glass companies.
We always remember who made the most money in the California Gold Rush of
1849. It was Levi Strauss supplying durable clothing to the miners, not the miners
who dug for the gold, who ended up rich.
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