The Dow closed down 295 points to 16,158 on heavy volume as WTI crude oil prices fell 5.5% to trade back below $30 per barrel.
Last night’s Iowa caucus was revealing in that outsider, anti-establishment groups from both parties took home huge chunks of support. “Out” is the new “in”. Sanders won half the Democratic vote while the Cruz, Trump, Carson combo won over 61% of the GOP vote. Since tax and economic policy proposals from these candidates are so very different, investors and company CEO’s might be inclined to play it safe until they get more clarity about who might prevail and set policy.
An interesting article in Reuters outlined the unfolding trend whereby companies, on a 2 to 1 ratio, are either keeping capex flat or reducing it for 2016. Energy companies are the biggest cutters of capex but across every industry group from healthcare to restaurants, capex budgets are being capped or reduced. Couple this with the rising savings rate amongst individuals and you can start to see a trend in which people and organizations are being conservative even as economists are forecasting GDP growth of 2% or higher. The reasons for the conservative approach could be because of uncertainty about China and the emerging markets, falling energy prices, Middle East conflict, “gflation” or the US Presidential election.
So far in 2016 gold and utilities are higher while banks and the 10 year treasury yield is down. All this is happening in the face of the Federal Reserve’s plan to raise interest rates 4 times this year. Even Zillow reported that mortgage rates are near a 3 year low which is not what one would expect in a supposed rising rate environment. In other words, market action is saying “we don’t think the Fed will raise rates 4 times this year”. Time will tell how this plays out but if US growth stagnates then Jane Yellen might have to yell “uncle” on her plan to normalize rates.
Google (aka Alphabet) reported solid earnings yesterday and today the stock was up in a down market. Googs posted an 18% revenue rise and a 28% net profit increase. Due to recent market action Alphabet (aka Google) now has a bigger market cap then Apple (aka Apple).