Thursday's holiday-shortened trading session marked only the seventh time since 1900 that the Dow ended the year with a loss of one percent or more. Of course, the last six times preceded year-beginning rallies. Not this time.
Investors spent much of December anticipating a Santa Claus rally. It never arrived. After a solid effort Tuesday in which the market popped, sending expectations higher, Wednesday and Thursday saw markets wade into the New Year's holiday with all the energy by which Trump ascribes to his GOP contenders.
Now, we wonder, if there will be a "January effect," a calendar-based forecast that postulates the following:
1. Losing positions were sold near year end to harvest the tax losses.
2. After 30 days, investors repurchase stocks, causing a January rebound.
True, some investors wait until January to sell winners, delaying the tax effect. But, this January fact can be telling. As many investors believe that, as goes January, so goes the year. Some even believe that, as goes the year's first trading day, so goes January, and thus the year.
All of which is to say that nobody knows nothing. Some investors will focus on the Presidential election year. Others will stick to the data. Others will play the longer-term secular cycles. Believing that the annualized direction is preordained. It is only the size of the gain or loss that remains to be determined.
Last month, the S&P 500 closed above its 20-month moving average. Typically serving as the delineating line between bull and bear markets. S&P 500 above the line? Momentum is bullish. S&P 500 drops below the line? Momentum becomes bearish.
Based on today's charts, we remain in a bull market. Too early to get aggressively bearish. Nor can we rule out another run up to new all-time highs.
However, a look at the action in the moving average convergence divergence (MACD) momentum indicator quickly knocks off your rose colored glasses. Even if the S&P 500 hits new highs, there's little chance that the MACD indicator will rise above its peak from last January.
Traditionally, this "negative divergence" is an early warning of a bull market's termination.
The takeaway from such meaningless verbosity? The need for a plan. Here's why.
Imagine that you take your family on a trip to NYC. Upon taking an 18th-floor room in a posh Manhattan hotel, you appreciate the view with spouse and kids. Revel at your good fortune. And then, being a prudent individual, you'd unpack your gear and familiarize yourself with the layout of the floor. Just on the remote and highly unlikely chance that something goes wrong and you must quickly get down and out. In other words, you craft a plan.
Sometimes the hotel incurs an issue that merits concern. But doesn't call for your evacuation. Bathtub floods? Call desk. Sit tight. Neighboring room sounds like a Duvall Street on New Years? Call desk. Sit tight. Wake up to alarms and the smell of smoke? Good thing you devised a plan.
Investing? No different. Nine of ten times? Nothing to worry about. Sit tight. But, on occasion, an acrid smell pervades the olfactory senses. Titillates the inner warning systems. Calls for action.
Trailing stops. Tactical asset allocation. Hedging. Alternative investments. All play a role. Perhaps you never use them. But, in 2000? 2008? You were thankful you did.
Our thoughts on 2015 and 2016? Laid out below. In assembling them, we recalled the words of Rob Arnott. "In investing, what is comfortable is rarely profitable."
Perhaps, this could be such a year. One requiring a bit of discomfort.
In the Middle East, the year ended as it began: explosively. Saudi Arabia executed a Shiite cleric. Iran, the Shiite counterbalance to Sunni Saudi Arabia for Middle Eastern domination, immediately spoke out. Culminating in the conflagration of the Saudi embassy in Tehran. As both sides dial up the confrontation, ISIS becomes the winner. Thriving on discord between Shiites and Sunnis. [Map of Sunni-Shiite region's here.]
Consequently, Bahrain, Sudan and United Arab Emirates followed suit. Severing ties with Iran. Further escalating the conflict. 1816. 1916. 2016. Some things never change.
In presidential politics, one month until primary voting begins. Establishment candidates continue trying to knock outsiders out of the race. If not at least from the catbird's seat. To date, however, Donald Trump continues to hold a sizeable lead over other GOP candidates. And Bernie Sanders still polls closely with Hillary Clinton in Iowa and New Hampshire.
The underlying story? Current attitudes and economic conditions play into the hands of political outsiders. 70 percent of the nation believes the U.S. is on the wrong track. More than 50 percent disapprove of the president's performance. And 50 percent think the economy will not improve this year. When pessimism achieves a penultimate threshold, insiders lose their luster. Thus The Donald phenomenon.
Finally, I saw a couple of movies over the holidays. The Force Awakens? Good movie. The Big Short? Excellent film.
Having enjoyed Michael Lewis's book a few years ago, I was doubtful as to Adam McKay's ability to translate the narrative of the Credit Crisis into a movie. At least one that was watchable. Man was I wrong.
Packed with A-list celebrities, the movie succeeds in multiple ways. Conveying complex financial issues to lay persons in a means that is understandable, interesting and entertaining. Often hilariously so. The cast is believable, smart and poignant.
For anyone seeking to spend two quality hours recapping an unpleasant chapter in recent history in a way that is almost guiltily pleasurable, see The Big Short. You'll get an in-depth look at the depraved depths to which Wall Street can descend. And feel smarter for having done so.
U.S. auto sales remained strong in December... 2015 auto sales are expected to top the record set in 2000... Hotel occupancy is the best on record... There was modest economic improvement... Consumer confidence beat expectations...
Initial jobless claims increased to 287k... Rail traffic continues to weaken... Chicago PMI signaled continuing Midwest manufacturing contraction... Pending home sales declined by 0.9%...
The Year that Was
2015 was a cocktail of excitement and frustration. Beauty and horror. Ecstasy and disgust. Consider some of its mile markers, more or less chronologically. From the prosaic to the improbable.
• The Ohio State University won the inaugural College Football Playoff Championship.
• Greece's debt drama and Syriza's electoral victory.
• The Charlie Hebdo terrorist attack in France.
• Kapersky discovers NSA's ability to hide spying software in hard drives sold in 30 countries.
• Birdman wins best picture Oscar.
• Israeli PM Netanyahu speaks before Congress trying to deter Iranian nuclear arms pact.
• Dawn spacecraft enters orbit around Ceres, the first spacecraft to orbit a dwarf planet.
• Unknown gunman shoots two policemen in front of the Ferguson (MO) police headquarters.
• Controversial Rolling Stone article retracted after an investigation concludes the story was fabricated and exhibited confirmation bias.
• Dzhokhar Tsarnaev found guilty for role in perpetrating 2013 Boston Marathon bombing.
• U.S. removes Cuba from the State Sponsors of Terrorism list.
• Protests in Baltimore against the death of Freddie Gray in police custody turn violent.
• Supreme Court hears arguments on whether the Constitution guarantees the right to marriage to same-sex couples.
• Baltimore says the six officers involved in arrest of Freddie Gray will face criminal charges.
• Floyd Mayweather, Jr. defeats Manny Pacquiao for the united welterweight championship at the MGM Grand in Las Vegas.
• Two Islamist gunmen attack an exhibition of drawings of the Muslim prophet Muhammad in TX. Both are shot dead by police. Islamic State claims responsibility.
• Dzhokhar Tsarnaev is sentenced to death.
• Shootout between biker gangs in Twin Peaks restaurant in Waco, Texas, leaves nine dead.
• David Letterman broadcasts last episode of 22-year run as host of The Late Show on CBS.
• State Department begins publishing Hillary Clinton emails concerning 2012 Benghazi attack.
• Emails drew controversy when revealed that Clinton used private e-mail server during time as Secretary of State.
• Flooding and tornadoes in Texas and Oklahoma leaves 17 dead and 40 missing.
• USA Freedom Act fails to reach 60 votes needed to pass in the Senate.
• Juan Pablo Montoya wins the 99th Indianapolis 500.
• Criminals hack IRS to access tax information of over 100,000 Americans.
• Cuba officially removed from the US State Sponsors of Terrorism list.
• Convicts Richard Matt and David Sweat escape from Clinton Correctional Facility in New York, prompting extensive manhunt.
• Former Olympian Bruce Jenner comes out as transgender woman going by "Caitlyn."
• Rachel Dolezal resigns as president of Spokane NAACP after she claimed to be black when she was white.
• Chicago Blackhawks defeat the Tampa Bay Lightning win their sixth Stanley Cup.
• Donald Trump announces run for the Republican presidential nomination.
• Golden State Warriors defeat Cleveland Cavaliers to win first championship in 40 years.
• China's Stock market crashes.
• Treasury announces that in 2020, a woman will replace Alexander Hamilton on $10 bill.
• Delaware decriminalizes possession and use of up to an ounce of marijuana.
• Lester Holt replaces a suspended Brian Williams as anchor of NBC Nightly News.
• U.S. Supreme Court rules that Constitution guarantees right to same-sex marriage.
• President Obama announces full re-establishment of diplomatic ties with Cuba.
• Oregon's decriminalization of recreational marijuana goes into effect.
• Illegal immigrant Francisco Sanchez kills 32-year-old Kathryn Steinle in San Francisco.
• BP agrees to pay $18.7 billion settlement in reparation for the 2010 Gulf of Mexico oil spill.
• U.S. beats Japan 5-2 in the final game of FIFA Women's World Cup.
• Scandal at the world's governing soccer body, FIFA.
• South Carolina State House removes Confederate battle flag from its grounds.
• Syrian refugee crisis begins.
• American Pharaoh won the first triple crown since 1978.
• Iran and U.S. agree to lift the sanctions in exchange for reduction of enriched uranium stockpile for next 15 years.
• Gunman attacks military installations in Tennessee. Five Marines killed and two injured.
• U.S. reopens embassy in Havana, Cuba.
• Hackers steal 2,500 customers' information from extramarital dating site Ashley Madison.
• Special Olympics World Summer Games open at the Los Angeles Memorial Coliseum.
• Bobbi Kristina Brown, 22, the daughter of Whitney Houston and Bobby Brown, dies.
• First GOP debate held.
• President Jimmy Carter reveals he is being treated for brain cancer.
• Kim Davis, clerk for Rowan County, Kentucky, sentenced to prison for refusing to issue marriage licenses to same-sex couples.
• Stephen Colbert begins his run as the successor to David Letterman.
• Volkswagen directed to recall 500,000 vehicles after accusations of emissions cheating.
• Pope Francis visits Washington, D.C., New York City, and Philadelphia.
• Speaker of the House John Boehner announces that he will resign.
• Boehner replaced by Congressman Paul Ryan.
• Royals won the world series. First in 30 years.
• NASA announces strong evidence that liquid water flows on Mars.
• First Democratic Party debate.
• Rhonda Rousey becomes the fight game's biggest name. Then its biggest upset.
• Obama extends U.S. military presence in Afghanistan until the end of 2017.
• Hillary Clinton testifies for second time before the Benghazi Committee.
• WHO releases finding that processed meat can cause cancer.
• Obama orders up to fifty special operations troops deployed in Syria to fight Islamic State.
• Amid racial tension, Timothy Wolfe, president of the University of Missouri, resigns.
• American airstrike in Syria killed Mohammed Emwazi, better known as Jihadi John.
• The downing of a Russian SU-24 by Turkish fighter jets.
• 14 people killed by Muslim terrorists at facility for mentally disabled in San Bernardino, CA
• Martin Shkreli is arrested on securities fraud charges for running a Ponzi-like scheme.
• World leaders reach a landmark, though inconclusive climate deal in Paris.
• Star Wars 'Force Awakens' release breaks multiple U.S. and global box office records.
• Arrest warrant issued for Bill Cosby for alleged drugging and sexual assault in 2004.
The Sunni-Shiite Fight
This excerpt from a Wall Street Journal op-ed by Middle East scholar Fouad Ajami, who died in 2014, "The Struggle for the Fertile Crescent," Jan. 14, 2013:
The Fertile Crescent's protagonists do not fight alone: On one side, there is the Iranian state, influential in Iraq and committed to the Syrian regime and to Hezbollah. On the other is the Sunni pact of Turkey, Saudi Arabia and Qatar. Egypt is of course a Sunni country but it has, due to its immersion in its own troubles at home, remained largely neutral in this struggle. This is a Sunni-Shiite fight, but religious devotion is not the measure of things. This is a very worldly grab for power and wealth and trade routes, and it is fought without sentimentalism or scruples.
This is a malady of that greater Middle East-its atavisms and ambitions. And to this malady, the United States today is a spectator.
Perhaps things would not be as they are if the Obama administration had opted for a residual U.S. presence in Iraq that would have checked the influence of Iran and given Baghdad greater assurance and nerve. Perhaps the conflict in Syria would have played out differently had we been spared the courtship of Assad in 2009 and 2010 by the Obama administration, and by an eager Sen. John Kerry, who ran interference for the administration.
With a more assertive American policy, perhaps a line would have been drawn for the Syrians in Lebanon. They had been banished from that country in 2005 thanks to the Cedar Revolution and to the "diplomacy of freedom" practiced by George W. Bush. The Syrians made their way back in 2009, the price for the Obama administration's "engaging" the dictatorships in Damascus and Tehran.
Say one thing about the people in the Fertile Crescent: If they had expected help and deliverance from the pre-eminent liberal power in the world, they now know better.
Major markets finished lower last week. The DJIA fell 0.72%, the S&P 500 lost 0.83%, and the Nasdaq declined 0.81%. Small cap stocks dropped 1.63%. And the 10-year Treasury bond yield rose 2 basis points to 2.27%. Gold lost $14.73 per ounce, or -1.37%.