David Ross

What I think I learned last week #54

Every investor is asking: “What happened to Santa?” He certainly has not appeared on Wall Street, where his annual rally is always much-anticipated. This year, the Santa Rally is more like the Santa Rout.

How bad is it? The proportion of S&P 500 stocks down at least 20% year-to-date hits its highest level since the financial crisis. On December 21, 44% of the S&P 500 are down 20%. This is the highest proportion since 2008 during the financial crisis, when 66% of the index dropped 20%.

Even the defensive sectors of the S&P 500, like utilities, real estate, health care and consumer staples, are down at least 9% from their highs. Oil has dropped 44% since October. Other than cash, there has been no place to hide.

All eleven sectors of the S&P 500 are on track to end the year with losses for the first time since 2008 and US and European stocks are on track to have their worst year since 2008. There are a lot of things going on in markets that look like 2008, or even the 1997 Asian currency crisis, but there is no economic crisis happening, which is what makes this market action seem stupid.

On Monday, Christmas Eve, even though it was only a half-day of trading, the Dow Jones Industrial average dropped 2.9%, breaking 1918’s record for the worst Christmas Eve trading performance ever.

The week ending December 21 was the worst week for US stocks since August 2011 as the S&P 500 lost 7.1% and the Nasdaq dropped 8.4%.

That loss puts this December, which is normally is a positive month, on track to be the worst December since the Great Depression. It is also likely to be the worst month since February 2009, just before the market bottom in early March.

As of this writing, cash in US dollars is up 1.7% for the year, ahead of both stocks and bonds. The last time cash outperformed stocks and bonds was 1994, and the last time cash was positive when stocks and bonds were negative was 1969.

As reported in the Wall Street Journal, data from Tabb Group show that quantitative hedge funds, or those that rely on models rather than research and intuition, account for 28.7% of trading in the stock market, a share that has more than doubled in the last five years. They now are the largest source of trades, more than retail investors, and more than everyone else.  Including investors such as passive funds, index investors, high-frequency traders, and market makers, approximately 85% of trading volume occurs from non-fundamental investors, or traders who conduct no research and could not care about a company’s valuation, balance sheet or income statement, according to Marko Kolanovic of JP Morgan.

The Fed raised its Federal funds rate by 25 basis points to 2.25%–2.50% at its December FOMC meeting, as expected, but signaled a slower pace of policy rate increases going forward. Stocks plummeted, posting the most negative stock market reaction to a Fed rate rise since February 1994.

The Bank of International Settlements, known as the “central bank for central banks,” said that the recent market jolt will be the first of many as the easy money era ends.

According to consulting firm PwC, China now has enough factories to build 43 million cars but will sell fewer than 29 million this year. That sounds like overcapacity to me, and probably to Peugeot as well. Peugeot has continued to open new plants during this Chinese auto boom. Sales of its Citroën and Peugeot cars, which it builds in partnership with Dongfeng Motor, peaked at 705,000 in 2015 and dwindled to 205,000 in the first nine months of this year.

The Munich-based Ifo economic institute said its German business climate index fell for the fourth month in a row to 101.0, its lowest level in more than two years. This was weaker than a Reuters consensus forecast of 101.8.

Total US retail sales, excluding automobiles, rose 5.1% from Nov. 1 through Dec. 24 compared with last year, according to Mastercard SpendingPulse, which tracks both online and in-store spending. This was the biggest increase in six years. Online sales continued to grow faster than sales overall, rising 18.3% during that time and accounting for 13% of total sales, the highest percentage ever recorded by Mastercard.

ECB officials said the eurozone’s neutral interest rate, which neither spurs nor slows economic growth, is probably below zero, and falling.

Danske Bank, cut off from its lucrative money-laundering business, issued its second profit warning and the stock price dropped to its lowest level in five years.

European equity investor John Bennett, who manages seven funds at Janus Henderson, has issued his outlook for the year ahead, stating that “European equities, as far as I am concerned, have already voted for recession.”

Speaking of Europeans, we have a list of Europeans on Santa’s naughty list. First up, perpetual arrestee Carlos Ghosn, was to be let out of jail, only to be re-arrested.

Next, we have European banks accused of price rigging by the European Commission. Named banks so far include Deutsche, Credit Suisse, and Crédit Agricole.

BMW, wanting to ignite something, is facing a criminal investigation in South Korean regarding engine fires.

Rounding out the quartet of miscreants is Airbus, whose stock fell 6% on news that the US Department of Justice has opened an official investigation into alleged corruption.

Finally, did you hear this? Danish headphone and speaker maker Bang & Olufsen lost a third of its value after it cut its sales outlook for the year.


And that’s what I think I learned last week.