Investment Commentary – February 3rd, 2016

Market Indices as of Market Close February 3rd, 2016

Dow   16,336 (-6.25% YTD)
S&P 1,912 (-6.43% YTD)
NASDAQ 4,504 (-10.05% YTD)
Global Dow 2,154 (2,077 52 week low /2,644 high)
10-year Treasury 1.87 (1.72 52 week low /2.50 high)
Gold 1,152 ($1,047 52 week low /high $1,269)
Oil $32.08 ($27.56 52 week low /high $65.69)


The week in review

* Home prices increased in November
* Pending home sales increased 0.1%
* Durable goods orders fell 5.1% m/m
* Flash Services PMI down to 53.7
* Consumer confidence up to 98.1
* Consumer sentiment down to 92.0
*New home sales increased to 544k
* ECI increased 0.6% in 4Q15

Real U.S. economic growth slowed to an annualized rate of 0.7% in 4Q15, but with consensus estimates of 0.8%, this report did not come as a surprise to markets. Expectations leading up to the report were for slower growth due to the familiar headwinds of low commodity prices, an inventory overhang and a strong dollar. Each of these came to pass, as shown in the chart. Business investment, for example,

detracted 0.2% from growth this quarter, as investment in mining and oil exploration structures decreased at an annualized rate of almost 40%. Strength in the report was similarly predictable, and although consumption slowed to an annualized pace of 2.2% last quarter, it still contributed 1.5% to growth, and residential investment proved to be a tailwind following an unusually mild start to the winter. In 2015, real GDP increased at an above-trend rate of 2.4%, matching economic growth in

  1. While there was some weakness in this quarter’s report, growth at an annual pace of 2.4% is consistent with our expectation for continued rate increases in 2016, and the details of this report highlight that the consumer is alive and well.


China’s Balancing Act: Maintaining Control Amid Mounting Market Pressures

China’s stock market plunge, currency weakness, and slowing economy have jolted global markets, but they also create attractive opportunities for long-term investors.


Key Points

*A swift and sharp decline in the currency is the main concern in China currently.

*China’s economy is unlikely to meet government growth projections, but a hard landing is not expected and the transition to a more consumer led economy is positive longer term.

*China has had a massive build-up of debt and non-performing loans, but it is most likely not headed for financial crisis given the government’s control over the financial system.

*China’s unwillingness to incur the pain of deleveraging swiftly takes a heavy toll on economic growth potential unless further transitional reforms are enacted.

*China’s currency is likely to remain under pressure as authorities seem willing to let it float within a range against a basket of other currencies rather than be pegged to the dollar.

*Many Chinese stocks with strong growth potential are trading at a significant discount to their fair value.

*Despite events in China, the structural growth story in Asia remains robust with healthy economies and favorable demographics.


February 3rd, 1913: Income Tax Becomes Effective

The sixteenth amendment to the constitution, which authorizes a federal income tax, was ratified; this was pushed through in part because of tariff reform.



The views presented are not intended to be relied on as a forecast, research or investment advice and are the opinions of the sources cited and are subject to change based on subsequent developments. They are not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy.