Imagine a soothing voice speaking: “You are in a very relaxing place. You can only hear the peaceful sounds of birds chirping in the background. A refreshing breeze blows across your face. Now repeat after me, ‘Lower for Longer, Lower for Longer.’ Let’s begin: ‘Lower interest rates than originally thought – lower for longer. Lower oil prices for 2015 – lower for longer. Slower than expected growth in US GDP – lower for longer. Negative returns for the major indexes for January – lower for…’ ” Wait, what!? “Okay, I see that our time is up, and I think we have made some progress today.”
There is nothing like some market volatility to send us straight to the self-help section of our local bookstore. The S&P, the Dow and the NASDAQ were all negative between 3% and 4% for the month of January. The volatility index, aka the “worry indicator,” increased 26% for the month of January. The factors driving market direction included further falls in the price of oil, earnings “misses” blamed on the strong US dollar, economic data below expectations, and elections in Greece.
While lower prices at the pump have been good for consumers, they have certainly taken their toll on energy and oil related businesses. The 60% decline in oil prices from their June 2014 levels has been largely attributed to excess production versus demand – increased US shale production more than slower global growth. The concern is that oil companies will cut hiring and investment as oil prices remain low, confirmed by both Shell and Chevron, which recently announced that they would be reducing their capital expenditures, more commonly known as cap-ex spending. In a case of the “haves,” Exxon could be in a prime position to make strategic acquisitions with its war chest of $5bn. The longer oil prices stay at these levels, the more likely we are to see significant consolidation of smaller or weaker oil producers…”Lower for Longer.”
Economic data out of the US was mixed with durable goods orders down (bad) for January while consumer confidence moved higher (good). Perhaps the lower prices at the pump and continued labor improvement gave consumers that little boost. Lack luster wage growth together with the current economics give the Fed all the “data dependent” ammunition they need to keep rates on hold for the first half of the year…”Lower for Longer.”
Not only are oil companies being squeezed by oil prices, but large multinational company earnings are being squeezed by the strong dollar. Firms like Caterpillar, Microsoft, Proctor and Gamble and Dow all missed their earnings estimates for the 4th quarter. Slowing global demand mixed with the strong US dollar were the main culprits for the multinational giants of industry. These big firms rely on exports for a large portion of their revenues. When the dollar strengthens rapidly against foreign currencies, these firms’ foreign earnings are worth less when converted back into dollars. Profits are hurt and targets are missed, which pushes markets lower.
Recent elections in Greece ousted the previous government that promoted austerity and fiscal responsibility. The winning Syriza party ran on a platform promising to have the EU write off portions of the national debt, create 300,000 new jobs, and increase minimum wage by 30%. We’re not sure how the newly elected Greek government hopes to accomplish this, but it did get them a lot of votes.
“Lower for Longer” is not all doom and gloom. For now, we still see “Lower for Longer” (oil prices, interest rates, inflation rates) as broadly beneficial to economic growth in the US, Japan, Europe, and other countries not dependent on oil or other commodities, which is currently reflected in our portfolios. Additionally we have recently made allocations in our models to global infrastructure and real estate, which impacts most of our clients. While global equities started off the year in negative territory, we remain positive on both US and international equities. As always please call or email us with any questions.