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While global markets got off to a brutal start in 2016, stocks rallied during the last eight trading days of January, resulting in the month being only the worst start to a year since 2009, rather than the worst January ever! At its lowest closing level, on Jan. 20, the S&P500 was down 12.7% and Canada’s TSX Index was down almost 25% from their record levels set last May. The impetus for the collapse in prices could have been a delayed reaction to the U.S. Federal Reserve raising interest rates for the first time in over 10 years in December, the collapse in oil prices to 2003 lows, weaker global economic data, selling from Sovereign Wealth funds, a hiatus in corporate stock buybacks or a combination of all of those factors. Whatever the cause, sentiment about the outlook for stocks in 2016 turned ‘on a dime’ from the views put forward late last year. The ‘stock market lemmings’ all jumped on the bearish bandwagon as the selloff led strategists at four major U.S. investment banking firms to cut their targets for where the S&P500 will end the year.
In the end, stocks had a tough month, with Chinese stocks leading the carnage, falling 21%. German stocks also were hit hard, dropping 8.8%, while U.S. stocks lost about 5%. After lagging global markets for the prior four years, Canadian stocks did better than most in January, dropping only 1.5% as strength in the gold stocks and a late month recovery in the beaten-down energy sector mitigated the losses to a large degree.
In terms of the sector performance in January, Energy was not the big drag it has been over the past year, when it was responsible for over 40% of the decline in the TSX index. Energy was actually a positive contributor in January as was the Gold sector, gaining 8.6%. Other gainers, as would be expected, included the defensive sectors such as Utilities (up 5.6%), Telecom (up 2.3%) and Consumer Staples (up 2.1%). The laggards included the Health Care sector (down 14.4%) and the Base Metals group (down 20.7%). Bonds got off to a good start in 2016 with the FTSE Bond Index returning 0.4%, despite some weakness in corporate bonds as credit spreads increased on worries about the economic outlook. The Bank of Canada held off on reducing interest rates further during their January meeting, which helped the Canadian dollar recover most of their early January losses to close at US71.4¢, well above the Jan. 20th low value of US 68.5¢.
Investor sentiment is one of the key variables we look at in assessing overall stock market risk. While much of our caution over the past year had been due to our views on slowing economic growth, extended stock market valuations, a peak in profit growth and the limitations of excessively easy money policies, we were also concerned about the fact that investors seemed almost complacent about financial market risks. That type of complacency is always indicative of peaks in financial market performance. While it is hard to quantify the overall sentiment of investors, there are a variety of well-accepted measures including the Investment Advisory Bull-Bear ratio and the AAII Sentiment Index. A newer and, in our view, more interesting and representative measure of investor attitudes comes from our friend at Google Search and is shown in the table below. While the history is shorter on this indicator, the breadth of participation is substantially more pervasive. It shows the Google searches for ‘Bear Market’ versus ‘Bull Market’ (black line) as well as searches for the word ‘recession’ (red line). The chart shows a peak in both searches at stock market lows in 2009 and again in 2011, which was the last correction of over 20%. While the recession indicator has not shown a marked increase, we have clearly seen a substantial rise in the ‘Bear vs Bull’ searches in the past month. While it may not mean we have seen the absolute lows yet in stock prices, chances are good that we are at least getting a temporary reprieve from the selling!
