Just 31 days into the New Year, investors are panicking…
More than $1.78 trillion has been wiped off U.S. markets… or just over $57.4 billion a day.
The entire market cap of Apple ($515.6 billion), Amazon.com ($243.5 billion), Alphabet Inc. ($475 billion), WalMart ($210.3 billion), Exxon Mobil ($336.5 billion), and Chevron ($160 billion) all wiped out in 31 days…
Clearly, there’s a great deal of fear in the markets…
No wonder investors are pushing into safe havens, like gold – now up 18% since the start of the year. Others are piling into cash and money market funds, where we’ve seen $208 billion of inflow. By comparison, investors put $7 billion into stocks since that time.
It’s the latest evidence of the excessive fear ripping through the financial markets amid crashing oil prices, a slowdown in Europe and China, softer economic activity, and incessant signs of a recession.
There’s plenty to be concerned about.
While there’s a time-tested strategy for navigating such volatility that’s worked quite well, let’s first discuss why investors are a bit nervous.
One, there’s the consumer.
Consumers are not quick to spend these days, as evidenced by the U.S. savings rate of 5.5%. It was 4.5% last year. Despite the 3.5% growth in discretionary income thanks to falling energy prices, that money was not spent.
It was saved.
And we can come to that conclusion by looking at retail sales growth of 2.1% for all of last year – the slowest since the last recession ended. We can see the aftermath of poor retail spending with WalMart’s (WMT) warning and the closure of 269 stores.
JC Penney (JCP) is closing about 100 stores. Macy’s (M) is closing 36 stores. We’re seeing incredible layoffs at Kohl’s (KSS), Bed Bath and Beyond (BBBY) and Best Buy (BBY), too.
All as pump prices have declined to the lowest point we’ve seen in years
Consumers are also worried about their jobs, as well as stagnant wage growth.
Two, there’s the Federal Reserve.
The Fed expects to see further signs of strength.
Unfortunately, investors are terrified of what the Fed will do next after it raised rates in December without fully understanding true unemployment numbers, inflation targets, or the strength of the consumer.
They also believe that strong consumer spending and lower oil prices could stimulate growth.
But we haven’t seen either to date.
Three, there’s the oil issue.
Despite headlines that OPEC is hinting at a production cut again, it’s not likely.
We also have to contend with heavy supply issues and little demand.
The IEA now expects for oil stockpiles to grow by two million barrels a day in Q1 2015, and 1.5 million by Q2. “If these numbers prove to be accurate,” it notes, “and with the market already awash in oil, it is very hard to see how oil prices can rise significantly in the short term.”
Meanwhile, demand is expected to weaken, as well.
Demand is forecast to fall to 1.2 million barrels a day this year, from the 1.6 million we’ve seen in 2015. None of this should come as a surprise, though. We’ve been warning about the imbalance in supply-demand for quite some time.
We also have to consider the record output from Iraq, where oilfields are producing as much as 4.13 million barrels a day. There’s Iran, which could ramp up production to 500,000 barrels a day, drenching an already saturated oil market even more.
Even here in the United States, the capacity to store oil has been exhausted… Cushing, Oklahoma storage tanks are nearing limits, for example, raising even more problems for oil prices.
In the process, as oil prices have declined, so has the junk bond market and banks with heavy exposure to oil names…
Look at junk bonds for example. Nowadays, many of these– rated CCC or lower – are now yielding 20% on average. That’s the highest level since the crisis of 2009, telling us these bonds are now exceptionally risky.
The writing is on the wall with this crisis, as commodities remain the biggest driver pressuring the high-yield market. The energy sector alone accounts for about 15% of junk bonds. About 15% comes from the metals and mining sector as well…
Hundreds of Thousands of jobs have been lost directly and indirectly to the oil decline, as well.
Four, manufacturing has weakened as China’s economy has slowed.
U.S. factory activity fell in January for the fourth straight month. The ISM’s manufacturing index moved up to 48.2 from December’s revised 48, but anything under 50 is a strong sign of contraction. It’s been under 50 since September, which isn’t a great sign.
While these are just some of the issues plaguing investors these days, sending them to the safe havens of gold and cash, we begin to understand why fear has reached epic highs.
However, the Markets are Resilient…
After more than 30 years of investing, hunting for value, and returning significant returns in The Cheap Investor, I’ve been very careful to point out that the road to riches isn’t paved in gold…
Not once, though, have I ever recommended that you sell all of your holdings, as other analysts and investors have foolishly been doing.
Instead, I’ve recommended that you conserve some cash with patience.
Since there are no certainties in investing, you need to make sure you have enough cash reserved not just for investing, but to meet near-term goals, as well. Always review what you have stored in investments. This is one of the top ways to protect your money in such a volatile market.
While volatility will persist as analysts yell “fire” in a crowded room, remember to protect yourself along the way… Along with strong, time-tested strategies, and a focus on pockets of market strength, investors will be just fine this year…