BCN ADVANTAGE: 2015 ANNUAL REPORT
For 2015, the S&P 500 declined a fractional -0.7% to 2,044, the Dow fell -2.2% to 17,425 and the Nasdaq rose 5.7% to 5,007. Stocks around the world began 2016 with one of the worst Januarys on record, as slumping oil prices, deepening concerns over China, and the Federal Reserve's first interest rate hike in a decade all combined to spook investors. The S&P 500 and Dow Industrials posted their worst weekly start ever. At the end of 2007 global debt stood at $142 trillion. By mid-2014 an additional $57 trillion had been added, and the data this year will show another record high. All the talk about deleveraging was only talk. Debt grew at a 5.3% annualized rate from 2007-2014. China's total debt has quadrupled, rising to $28 trillion by mid-2014, from $7 trillion in 2007. Throughout 2015, U.S. corporations spent$1 trillion on share repurchases and dividends, most of it borrowed.Household debt grew 2.8%. Financial sector debt grew 2.9%. Corporate debt grew 5.9%. Government debt grew 9.3%. GDP grew just 0.7% in the fourth quarter, despite 7 years of zero interest rates, $3.7 trillion of Fed money printing and $9 trillion added to our Federal debt. Global stock markets lost nearly $8 trillion in January. Remember that stocks are the only true leading indicator of economic expansion and contraction. Jobs peak after stocks and the economy have already begun to decline, with a lag of 6 - 9 months. Stocks peaked in May 2015. The weakness in the Dow Transports, down -30% from its November 2014 high, shows the U.S. could already be in recession. The index is one of the most economically sensitive and should benefit from low oil prices. Instead it's collapsing. A repeat of 2008-09 is unlikely - but the monetary and fiscal stimulus needed to battle even a mild recession is no longer available. The Fed typically needs 3.5% of rate cuts to work its magic. The world has never seen a full-blown recession with interest rates this close to 0% in both the US and Europe. For all of 2015, the U.S. added 2.65 million jobs, down from 2014's 3.12 million but still the second-best since 1999. The unemployment rate currently holds at 4.9%.At its December meeting, the Fed raised interest rates for the first time since 2006 and signaled four additional quarter-point rate increases throughout 2016. Wall Street, though, is pricing in almost no chance of a move for the remainder of 2016, with the first increase not fully priced in until June 2017. Expectations for rising rates are putting upward pressure on the dollar, and the implications for earnings are significant. Over 30% of the revenues for S&P 500 companies come from outside of the U.S. Former Dallas Fed president Richard Fisher thinks the Federal Reserve is out of tools to help markets. "I don't think there can be much more accommodation,"Fisher said. Fear is gripping the bond market. The yield on the U.S. 10-year Treasury note recently dropped below 1.8%. At $30 per barrel, oil prices have fallen to their lowest levels since 2003. Lower energy prices were expected to benefit other sectors of the U.S. economy. Now that tune has changed. December showed an unexpected drop in retail sales and a continuing fall-off in industrial output. Long-term debt for oil exploration and production exploded by 70% since 2010 to $353 billion. In December, the high-yield bond market came under pressure as worries abounded that energy-related companies would default - potentially impacting the broader markets. Officially, the U.S. economy has endured seven recessions over the last 50 years. In every instance except 1974, S&P 500 earnings had peaked and were in decline immediately prior. Q4 2015 earnings are on track to decline 4.1%, the biggest drop in six years and following on the heels of Q3's 0.8% dip. Revenue is headed for a 3.5% decline after sinking 4.4% in Q3. If profits finish negative, it would be the first earnings recession since the 2-year slump that began in Q4 2007. There is mounting evidence the U.S. stock market is being decimated by a "stealth" bear market. The S&P1500 index - a broad basket of large, mid and small company stocks - shows that the average stock has fallen -26.9% from its 52-week high. Energy stocks - the worst-performing sector - are down 52.1%. All indications suggest a late-stage top of the third speculative bubble in 15 years, with the major U.S. indexes facing -20% to -40% declines before finally bottoming in early 2017. Stocks are collapsing for a myriad of reasons: Negative earnings, the end of QE and zero interest rates, rapidly diminishing stock buy-back plans, collapsing oil and commodity prices signaling weak global growth, an imminent U.S. recession that even if mild, comes at a time when the Fed is powerless to do much more than NOT raise rates. Central bank interventions will become increasingly ineffective as the time-tested law of diminishing returns rears its ugly head. Central banks have waged a desperate battle against weakening consumer demand with policies that, in the long run, will only exacerbate it. By artificially lowering interest rates (through QE, ZIRP and now negative interest rates), central banks have encouraged massive government and corporate borrowing. By definition, borrowing draws otherwise future consumption forward, and in the short run does provide a brief (but unsustainable) economic boost. But then poof! All that's left is the hangover: mountains of debt with the bills coming due and no wherewithal to buy more. Global economies wake up to slackening demand and systemic long-term deflation. Without the promise of a boost from capital spending by corporations, an infrastructure program financed by the federal government, and/or reform of the tax code, there is virtually no chance that self-sustaining growth in the economy can be achieved. And none of those things are likely to happen during 2016.
