Market Snapshot January 2016

MARKET SNAPSHOT

Words From Withers

Well , here we are again in the new year. It looks like my " r iptide " analogy from my last note was an appropriate one as the market so far this year has pretty much stunk up the joint.

I ' ll be the first to say it: times like these can be tough. Getting days that are back to back sell offs can be enough to make even the most optimistic among us start searching around for some sand in which to bury our heads!

Chin up, though - times like these are usually when you can pull the most useful information and start sketching out your strategy going forward. Let ' s take a look at what I ' ve been keeping a close watch on:

Macro Fundamental

After a long wait, that " Fed " interest rate increase we ' ve all been on the edge of our seats for, finally arrived on December 16th. They hiked it up by 25 basis points (that ' s fancy talk for " one quarter of a percent" ).

So, anyone want to venture a guess at where the market interest rate is now? Anyone? I ' ll save you the suspense: the ten year treasury rate is now lower than what is was on the day the Fed raised rates, the exact opposite of what most expected would happen

If your head ' s spinning, don ' t panic. Counterintuitive imbalances like this are more common than you ' d think, and luckily they have a fairly straightforward explanation. The Fed might set the short-term lending rate, but actual treasury rates are established by the market through buying and selling. (Take that, government!)

When rates on treasuries fall, it ' s often because forward-thinking people are moving out of higher-risk assets like stocks and shifting to safer bets, namely, bonds.

Now, if we get in the heads of the above forward-thinking folk for a moment, we gain some valuable insight: this type of move from stocks to bonds is usually a dead giveaway that people are expecting an economic slowdown. In short, the treasury market is showing a few warning signs about economic growth (at least temporarily).

Let ' s shift our focus over to oil prices. The current prices on the WTI (more fancy talk for West Texas Intermediate) are just now trading at under $30 per barrel. Unless you ' ve somehow avoided fueling up your car in the past few months (Tesla drivers, looking at you), you ' ll have noticed gas prices are low - really low. In fact, these prices take us back to early 2000 ' s level.

(fedprimerate.com/nymex-oil-future-chart.gif)

At the pump, these rock-bottom prices seem fantastic. But oil selling this cheaply is actually putting an entire sector of our economy in peril. Bankruptcies will occur and people will be out of work. This hurts.

And, while Saudi Arabia continues to pump oil at a record pace (and as of this week, Iran), it ' s only part of the problem. There ' s concern that global economic demand will continue to be weak, and while there ' s been hope that the lower oil prices will spark an increase in consumer spending, so far that ' s not been the case.

Of course, let ' s not forget to check in on our trusty dollar. Among many, one of the largest headaches our Federal Reserve Committee has right now is a tricky one: at the moment, the U.S. is providing a quite-reasonable 2% return on our ten-year treasury and has us ranking as one of the strongest currencies worldwide. Sounds good, right?

Unfortunately, many of our companies sell a lot of stuff overseas. When these products are bought in foreign currency, that money makes its way back over here and gets converted back to dollars. The overall effect: a big hit to our earnings and growth rate.

While there are a few other factors at play, it's these three behemoths - interest rates, oil and the dollar - that are aligning to forecast a slower economic growth rate for the moment.

Micro Fundamental

Earnings season has begun and it ' s not pretty - JP Morgan, Intel, and the like are all performing poorly. Celgene lowered its 2016 guidance, and that ' s worth noting as biotech and healthcare have seen nothing but clear skies since the market bottom of 2008.

The real problem, though, is that this increase in uncertainty makes it a lot harder to fairly analyze and value a company. What will the overall sales rate look like? How much can they cut costs? Can we find an appropriate discount rate to use for my valuation? All of this is looking fairly cloudy, which points to more fluctuation in your price targets.

In my experience, when the economy slows down, we see projections and values dropping along with a huge amount of scrutiny suddenly paid to a company ' s ability to sell stuff. A company that can increase sales in a slowing environment is like finding gold in your cereal bowl: unlikely, but certain to attract a lot of attention (read: capital) when it happens.

To find these gold-nugget companies in a sea of cornflakes, though, you ' re going to have to get your hands dirty and start sifting through a heap of financial reports and start analyzing.

Sound fun? Let ' s take a closer look.

So where are we, technically?

I ' ll be honest: I don ' t see a lot of stuff I like right now in terms of specific stocks.

Luckily for us, there are a couple of handy indicators that I use to give myself an overall sense of the market. They are:

The Dow Jones Transports Average: I like to look at this guy because in a good economy, goods get shipped. The companies most responsible for moving all this stuff around are found in the Dow Jones Transports Average. Now, we know that railroads are down because energy has been hit, but this chart, in my eyes, shows we may still have a bit more weakness on the way.

Source: Worden Brothers TC2000

The Advance/Decline line: Okay, I know this looks elementary, and it is - the Advance/Decline line is simply an illustration of stocks that are either rising in price (advancing) or heading in the other direction (declining). While this may seem like a "Duh" chart, the thing to pay attention to is the moving average. The balance of stocks on the decline is growing and, much like the transports chart, points to more weakness to come.

Source: Worden Brothers TC2000

So what the heck should I do?

That depends - are you managing tactically or strategically?

In the tactical models, we look at individual stocks and are geared to go to cash when we think things are starting to go sour in the market (at least in the temporary.) For this type of model to work, you ' ve got to be active. And that ' s exactly what we ' re doing: for these models, on average, we ' re over 90% cash. I see a lot of companies that I ' d love to buy on a valuation basis, but the market is too messy here to gain an " edge. " And when I don ' t have an edge, I don ' t invest.

On the flip side, for those taking the strategic route and have money in mutual funds, I think your approach needs to be a little different.

I ' m recommending you evaluate your time horizon for those investments you ' re holding. You need to be comfortable with the amount of risk you ' re taking and balance it between the equity funds and the bonds you hold.

For 401k participants, it ' s simple: don ' t stop saving. If you are young and have years until retirement (you lucky duck), then these lower fund prices will allow you to buy more shares, which is always good news in the long-run.

And, finally, look into developing a rebalancing process. Many times, the stock market will rise and an investor ' s risk gets skewed, simply because this makes their portfolio more heavily weighted towards equities. A rebalancing into your original allocation - even just annually - can help keep your risk profile consistent for many years to come.

I hope this all makes you breathe a little easier. Market downturns are a natural and normal occurrence and have occurred many times in our history (though we always tend to panic when we ' re in one!). More often than not, these downturns are healthy as they provide the re-pricing that ultimately will help the market begin a new climb.

Here ' s my final advice: reevaluate your investment approach, build a plan to execute this strategy and, above all, be patient.

Best,

Tim

Tim Withers is Chief Investment Officer of MSW. He has over 20 years of experience managing money on both an asset allocation and tactical basis for clients as well as serving as investment analyst to qualified retirement plans and individuals. He holds a BA from Connecticut College and an MBA from the Wharton School at the University of Pennsylvania.

Disclosures:

S&P 500 An index of 500 stocks chosen for market size, liquidity, and industry grouping, among other factors. The S&P 500 is designed to be a leading indicator of U.S. equities and it meant to reflect the risk/return characteristics of the large cap universe.

Dollar cost averaging does not assure a profit and does not protect against a loss in declining markets. This strategy involves continuous investing; you should consider your financial ability to continue purchases no matter how prices fluctuate.

"Asset allocation does not protect against loss of principal due to market fluctuations. It is a method used to help manage investment risk."

Rebalancing assets can have tax consequences. If you sell assets in a taxable account you may have to pay tax on any gain resulting from the sale. Please consult your tax tax advisor.

Securities and Investment Advisory Services offered through NFP Advisor Services, LLC (NFPAS), member FINRA/SIPC. NFPAS is not affiliated with MSW Financial Partners.

The above links are provided for your information only. As they are provided by third parties, NFP Advisor Services, LLC (NFPAS) does not endorse, nor accept any responsibility for the content. NFPAS does not independently verify this information, nor do we guarantee its accuracy or completeness.

The material is for informational purposes only. It represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events or a guarantee of future results. It is not guaranteed by NFP Advisor Services, LLC for accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. It should also not be construed as advice meeting the particular investment needs of any investor. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security.

The indices mentioned are unmanaged and cannot be directly invested into. Past performance does not guarantee future results. The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the US stock market.

200 Canal Street

Marshfield, MA 02050

[email protected]

781.319.0098

Cell: 617.312.6256

GV: 617-396-4TIM (4846)

JOIN OUR MAILING LIST

Securities and Investment Advisory Services offered through NFP Advisor Services, LLC (NFPAS), member FINRA/SIPC, NFPAS is not affiliated with MSW Financial Partners.