It has been another rousing week here at Sentara Capital with the financial headlines changing by the hour.
Behind the scenes during more volatile times in the markets we are monitoring client portfolios to insure that losses are contained. If there are individual positions that are suffering steeper losses than we anticipated then we will make adjustments. We have been very pleased with the results so far this year, but it is an ongoing process. Market declines are not all created equal, the playbooks change, the investment mix that worked well before won't necessarily work well the next time. Market conditions change over time and that is why it is imperative for us to continue to closely follow them. It gives us the ability to create a new playbook instead of relying on a previous playbook.
Chinese markets were closed for the Lunar New Year holiday this week but that didn't mean global markets were in for a calm week. Japanese stocks led the way lower, with their worst week since 2008, down 11%. The Bank of Japan surprised investors on January 29th by announcing negative interest rates, meaning banks would have to pay the central bank to keep excess reserves at the central bank. Since that time investors have sold bank stocks concerned that negative interest rates would lead to a very challenging environment for the sector.
Also weighing on the market this week was Deutsche Bank, Europe's largest bank, which continued to see its share price fall, down almost 40% in just six weeks. This company has been on our radar screen since last summer when their CEO abruptly quit after just one month on the job. Since then the stock has been collapsing, the company reported operating losses for calendar year 2015 and is facing regulatory hurdles. Add to this concerns that the company has over $70 trillion of derivatives exposure and it is not difficult to see why Deutsche Bank has led the banking sector in Europe down 30% year-to-date.
Big U.S. banks have declined 20% and have led our markets lower, taking the mantle from energy companies which were the primary drivers of lower prices early in the year. Today Jamie Dimon, CEO of JP Morgan, bought $26 million of JP Morgan stock, which lifted shares of JP Morgan and other bank stocks. There is no question that the balance sheets of U.S. banks are very strong, but the market is clearly concerned about the impact lower interest rates, European bank problems, and slower Chinese growth will have on U.S. banks.
A few noteworthy items:
Gold: The precious metal has rallied to $1,239/oz, up over 8% in the last week alone. Gold has been in a bear market since 2011 so this recent rally is the first real strength the metal has seen in some time. We will be watching to see if this strength can be sustained.
The Fed: Coming into the year the Fed signaled their intent to raise interest rates four times in 2016; however the market is now pricing in a less than 25% chance of even one interest rate increase in 2016.
Meanwhile bond rates have had a steep decline since the start of the year on worries of weak global growth and deflationary concerns. The yield on the 10-year U.S. Treasury has fallen from 2.28% on January 1st to 1.70% today. It is worth nothing that the drop in bond rates accelerated when the Bank of Japan surprised investors on January 29th by announcing negative interest rates. For more on negative interest rates I suggest you click here.
The U.S. Consumer: The Commerce Department reported Retail Sales grew .2% in January, a 3.4% increase over last year. This was a strong showing by the U.S. consumer and a much needed bright spot to the economic data that has been released so far. Any fears that the U.S. is in a recession right now can be put to rest with this report.
The decline in stocks here in the U.S. have brought valuations back to very reasonable levels and certain sectors have become cheap for the first time in a long time. That being said, the market is at a key technical level which means a level where buyers have been coming in to keep the market from further declines. Over the next few weeks it will be important to see if this key technical level can hold as more developments unfold concerning the Europeans banks and the Chinese economy.
As always we will be closely watching and taking care of your portfolios.