Your Wednesday Market Blip 1/6/16

Your Wednesday Market Blip 1/6/16

Stocks continue in the red as the Dow slumped 252 points to 16,906 on heavy trade. Markets are now below recent support and in a correction mode as we head into the 4th quarter earnings season.
Since the start of 2016 many people are forecasting what the economy and markets will do over the next 12 months. In the past three days I have been reading reports from unrelated analysts that all have some common themes. These themes are: “weak earnings”, “margin compression” and “PE ratio contraction”. These do not bode well from 2016.
Evidence of possible “compression” is seen in car sales. While 2015 was a record year for sales, AutoNation (largest car dealer in US) CEO Mike Jackson, said Q4 the sales environment shifted from “pull to more push” meaning that instead of people rushing to buy cars the dealers had to incentivize buyers. Mike said the consequence of this is “significant margin declines” and that his company was beginning to take steps to align costs, inventory and pricing with this new reality. While he still expects car sales in 2016 to exceed 17 million he is indicating that profits per vehicle could be lower. If this trend is for real we could also see pressure on manufacturers and suppliers to make adjustments during 2016 as well.
Oil and material prices continue to be weak. WTI crude today fell below $35 a barrel and gasoline prices fell too as stockpiles were up a whopping 10 million barrels vs an expected drawdown. This affects margins. In Montana, log prices are off $150 to $200 a thousand board feet and many mills are sitting on high priced logs with little to no pricing power on the finished end. This affects margins. Get the picture?
On the plus side, ADP reported that private employers in the US added 275,000 jobs in December, well above the 192,000 figure that was expected. The US service sector also continues to expand with the latest reading at a healthy 55.3. While this reading was less than expected it is still in solid growth territory.
In summary, strong job creation and a growing service sector is offsetting margin pressure resulting in an economy that continues to sputter along. Throw in overseas turmoil and it is no wonder investors are cautious.