If there’s one thing I’ve learned in my 30-plus years in this business, it’s this: Some years start with a bang, and some years start with a whimper. However, the first few trading days in January do not necessarily set the tone for the rest of the year. That said, let’s review what has caused the financial markets to wake up on the wrong side of the bed this week. I’ll then provide my actionable advice for how to protect your portfolios while this shakes out.
For the third day this week, global uncertainty has spread to U.S. markets. On Monday, escalating tensions between Iran and Saudi Arabia roiled financial markets. Investors also fixated on China’s lackluster Purchasing Manages’ Index (PMI), which fell to 48.2 in December. While this was a small decline from November’s 48.6 reading, this is the 10th month in a row that China’s manufacturing sector has shrunk.
After a modest rebound on Tuesday, the market promptly resumed its temper tantrum on Wednesday. Possible causes ranged from North Korea’s alleged hydrogen bomb test to falling oil prices to the Fed’s statement that afternoon. Let me take a moment to address oil prices and the Fed, which are more pertinent to the market.
There’s no doubt that crude oil prices are going to remain depressed for the foreseeable future. Saudi Arabia and Iran continue to pump oil at a frantic pace, and without their cooperation, there’s little chance that other OPEC members will agree to cut production. This, coupled with China’s slowing economy, and the strong dollar, dragged global crude prices to a 10-year low today.
So, I advise everyone to continue to avoid energy and commodities stocks. I’ve been receiving questions about whether there’s a buying opportunity in the beaten down energy patch, but there’s just too much downside risk there. Instead, I’m loading up on consumer stocks that are benefitting from falling oil prices.
Moving onto the Fed, I thought that yesterday’s FOMC minutes were very insightful. A number of Fed officials were clearly concerned about persistent deflation, suggesting that the FOMC will think very carefully before raising rates again. This, of course, is good news for the stock market.
As far as today is concerned, it appears to be more of the same. The U.S. indices are down about 1%, and once again China is the main culprit. This time, the yuan is in freefall after China’s central bank devalued the currency again. China also revealed that it spent $500 billion of its foreign currency reserves to prop up its currency last year.
I understand that there is a lot of global uncertainty out there, and that it’s frustrating to start the year on a shaky foot. However, with a good investing strategy, these kinds of pullbacks can open up solid buying opportunities. To that end, I’ll continue to be in touch through this daily blog as we navigate the changing market.
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