The Daily Difference: Tail Wagging the Dog

As the Gill Capital Partners’ Investment Committee gathers around the table to review, discuss and debate recent market movements, the biggest question has been what, if anything, has changed over the last few weeks? The only quantifiable change has been a 20% drop in oil prices, which has taken the markets hostage and caused confusion and fear among investors. On Wednesday, we saw sizeable swings in all markets, as the Dow traded down intraday 565 points, only to rally back over 300 points to close down 249 points. The markets are trying to digest to what extent the collapse in oil will impact an otherwise healthy economy. We continue to pull research, analyze data, and have discussions with our many partners including Bloomberg, Goldman Sachs, BlackRock, JPMorgan and others. Here are the themes we have focused on over recent days:

  • Oil is almost exclusively to blame for the volatility so far in 2016. The oil decline has been vicious and has taken most investors by surprise. Goldman Sachs President and COO Gary Cohn said Thursday, "What I think the confusing part of the oil market is, everyone's relating the sell-off in oil to be an economic slowdown," Cohn told CNBC's “Squawk Box” at the World Economic Forum in Davos, Switzerland. "I don't believe the sell-off in oil is reflective of an economic slowdown. We're not seeing a demand slowdown in oil," Cohn said. “What we're seeing is a massive oversupply of oil." In the opinion of our Investment Committee, oil must stabilize for markets to respond positively. It does not necessarily have to rebound sharply for the stock markets to move higher, but it does need to find a bottom.
  • Economic data is currently not indicating a recession. Economic reports remain very stable in both the U.S. and internationally. Corporate profits have remained solid as well, with 67% of the companies reporting beating estimates for the 4th quarter. Financial institutions specifically have had good earnings, but have gotten caught up in this decline as well. Markets are not rewarding these companies and valuations are becoming attractive at these levels.
  • Volatility has dramatically escalated as measured by the VIX, a gauge of the market’s anxiety level. Market bottoms are formed in extreme high readings on the VIX. We are currently seeing the VIX approaching the territory where we have seen past market bottoms.
  • Investor sentiment, as measured by the American Association of Individual Investors, is currently reporting a significant level of negativity, which is commensurate with past major cycle lows. To be clear, negative sentiment has been one of the most consistent indicators of historical market bottoms.

While we are not foolish enough to attempt to call a bottom in the markets, the combination of the above items give us comfort that long term investors will be rewarded and short term movements should not deter investors from their long term objectives. We understand that the volatility can be unnerving and makes for great news headlines, but during times like these, history has taught us to focus on fundamentals, tune out the noise, and look for opportunity rather than heading for the exits.