If 2014 went out with a bang, 2015 came in with a whimper.
Over the past week, the Dow Jones fell 3.40%, the S&P 500 dropped 3.74% and the NASDAQ tumbled 3.87%. Global markets offered no safe haven, with the MCSI Emerging Markets Index falling 3.41%.
The only gainer in your Alpha Investor Letter portfolio was the PowerShares DB US Dollar Bullish ETF (UUP), which ended the week 1.72% higher. Surprisingly, the Vanguard Russell 2000 Index ETF (VTWO) actually hit a new 52-week high before pulling back.
Several of your positions fell below their 50-day moving averages and moved to a HOLD. These included Berkshire Hathaway (BRK-B), Guggenheim Spin-Off (CSD), iShares S&P Global Timber & Forestry Index (WOOD), Global X Guru Index ETF (GURU), Vanguard Russell 2000 Index ETF (VTWO), Markel Corp. (MKL) and Union Pacific Corporation (UNP).
It has been a rough start to 2015, with the S&P 500 Index falling 1.9% on Jan. 5, its biggest decline since October.
The two apparent culprits behind Mr. Market’s mood swing are the falling price of oil and the fact that global growth is slowing. Yes, the oil price is falling. But this situation should be a boost to global growth, not a drag on it.
On the one hand, as the chart below from Bloomberg confirms, a falling oil price is a boost to global growth for most economies.
For the United States, $40 per barrel oil would accelerate economic growth to 3.8% over the next two years, compared with 3% economic growth when oil is at $84 per barrel, the Oxford Economics study found. So the fear about global growth is unfounded — although economies like Saudi Arabia, Russia and the United Arab Emirates are set to suffer disproportionately.
On the other hand, while cheaper oil helps consumers, a falling oil price will cause a 20% to 40% drop in investment by oil companies, according to Oppenheimer & Co. Oil at $50 a barrel could trim $6 a share off earnings in the S&P 500 Index this year, according to Bank of America.
So the falling oil price is good for consumer stocks, and bad for energy stocks. That is something to keep in mind for your Alpha Investor Letter recommendations in the year ahead.
Berkshire Hathaway (BRK-B) lost 3.45% over the four-day holiday week. I occasionally refer to “Mr. Market’s mood swings” when describing the often haphazard movements of the market. Last month, Warren Buffett went a step further than I do, calling Mr. Market “a drunken psycho that one should sell to when he is enthused and buy from when depressed.” This is, of course, the simplest and best investment advice that money can buy — as proven by Mr. Buffett’s $74 billion career gain. BRK-B dipped slightly below its 50-day moving average (MA) to become a HOLD.
iShares S&P Global Timber & Forestry Index (WOOD) gave back 3.00% last week as the broader markets pulled back significantly. WOOD has held up remarkably well during recent weeks, even flirting with its past 52-week high the week prior — a level last attained back in March 2014. WOOD also fell below its 50-day MA to become a HOLD.
Vanguard Russell 2000 Index ETF (VTWO) fell 3.09% last week. Although the Russell 2000 is traditionally the more volatile of the popular market indexes, VTWO fell less than the Dow Jones, S&P 500 and NASDAQ last week. VTWO also managed to hit a new 52-week high last Wednesday. However, VTWO pulled back enough to become a HOLD.
Skyworks Solutions Inc. (SWKS) lost 4.16%. Analyst firms DA Davidson and MKM Partners each raised their price targets for SWKS last week to $85 and $83, respectively. Each firm also has a “Buy” rating on the stock. SWKS remains a BUY in the Alpha Investor Letter portfolio.
PowerShares DB US Dollar Bullish ETF (UUP) gained 1.72%. As the sole bright spot in an otherwise dismal week, the mighty dollar powered higher. Many world currencies continue to weaken, maintaining a significant tailwind for the seemingly unstoppable rise of the U.S. dollar. UUP remains a BUY.
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