Tahoe-Truckee Market Beat: Market volatility in January
January was a choppy month for the stock market, and the worst month since January of 2014.
There was a lot of economic news to digest last month. Fourth quarter earnings got under way, the Swiss announced that the Franc would decouple from the Euro, and the European Central Bank, ECB, announced it would begin a round of quantitative easing, or QE.
There are concerns that the global economy is deteriorating. The saga in Greece continues, Japan is in a recession, and Europe has an 11 percent unemployment rate.
The falling price of oil has had an impact on the major oil exporting countries like Saudi Arabia, Russia and Venezuela.
There has been a lot of talk about 1930s-style deflation in the press. I’d like to point out the difference between “good deflation” and “bad deflation.”
Good deflation is when prices fall, but demand remains constant or increases. The price of oil and gas are falling, but the demand is still strong and that will free up money to be spent elsewhere in the economy.
Bad deflation is when prices fall due to a lack of demand, like high unemployment.
Another trend that continued in January was the strengthening of the US dollar. The strong dollar effect will hurt some large US-based multinational corporations that earn a high percent of their money overseas.
But historically, our stock market has performed well during dollar bull markets. One reason for this is that foreign funds are attracted to our markets because of the dollar strength, so Price to Earnings (PE) multiples also tend to rise.
Overall, the US economy is still showing signs of growth. The most recent GDP report, released on Friday, showed that the economy grew at a 2.6 percent annualized rate in the fourth quarter.
While that number was a little bit worse than expected, it still shows growth and it comes after a very strong third quarter.
Prolonged bear markets in stocks usually occur during times of recession.
Kenneth Roberts is a Truckee-based Registered Investment Advisor. Information is at his blog at http://www.sellacalloption.com or 775-657-8065. The mention of securities should not be considered an offer to sell or solicitation to buy investments mentioned. Consult your investment professional to understand the risks and/or how the purchase or sale of these investments may be implemented to meet your investment goals. Past performance is no guarantee of future results.
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