Friday was the first official trading day of 2015. The risk-on mood that emerged in the middle of December faded a bit last week as investors sold stocks and bought bonds.
Of course, one day… even one week… of weak stock prices isn’t much of a trend.
The long-term and dominant trend in stocks is still up. And with positive seasonality through April, stocks could continue to trade higher once investors fully settle into their trading routine for this new year.
I’m watching for good opportunities to buy into dips. And, as always, I’m keeping an eye open for smart ways to hedge our portfolio.
As I emphasized at our Irrational Economic Summit in October, I believe 2015 will be defined by divergent trends spurred by central bank policies which can no longer be expected to move in lock-step, as they did in the wake of the 2008 global financial crisis.
In short, 2015 should be chock full of opportunities.
Let’s take a closer look at these trends as we go around the market in 10 seconds…
• Global stock markets were weak, with the exception of Chinese shares which bucked the downtrend and rose 3.3%. Small-cap stocks (IWM) lost just 0.7% — a milder loss than the S&P 500 and a sign that some investors are now willing to buy the discount in this niche.
• Bond markets rose, led higher by a strong 1.2% gain in Treasury bonds (IEF). Meanwhile, junk bonds lost 1% and emerging-market bonds fell 1.4%. Our “high-quality” bond spread trade (long IEF, short JNK) gained a nice 2.2%, proving its ability to act as a smart hedge during periods of risk aversion.
• Commodity markets continue to show weakness, as oil (USO) dropped another 5.5%, sending prices to a five and a half-year low. Be happy if you avoided the temptation to buy into the early stages of oil’s “pullback” as it has devolved into a very deep, money-destroying selloff. In fact, USO is down a full 27% since December 1, around the time I recommended NOT making any long investments in oil or energy stocks, even as tempting as it was to “buy the discount.” This market epitomizes the pain that can be inflicted when investors try to catch a falling knife.
I’ll be watching closely this week to see how investors react to the first full week of 2015.