JANUARY 2014 INVESTMENT JOURNAL: CREAKY CURRENCIES
- Janet Yellen confirmed as new Fed Chairman
- Emerging markets currencies tumble
- FOMC meets and continues tapering program
The beginning of the new year saw market returns that were almost exactly opposite December's strong finish. Stocks slumped globally while a "flight to quality" produced classic outperformance by the "safe havens" of gold and bonds :
Despite the sell-off, stocks continue to lead all other investment categories over the last three years. It would take a significant and sustained sell-off to pare back the performance advantage logged by stocks of late:
January began quietly, but markets soon got some indigestion as the month progressed, mostly caused by a loss of confidence in emerging markets and their plunging currencies. We'll take a look at that a little later in our Journal.
But first, let's put some perspective on what many participants are calling a "healthy breather" for stocks. In the U.S., the long term trend for stocks is still in a very healthy posture. As long as the price momentum remains favorable, there is no need for a major shift away from current allocations to US stocks. If price momentum weakens such that the support line is breached (red arrow below), it would be time to reduce stock holdings, but the time is not now:
High quality bonds, after selling off last summer, have regained some of their strength and are poised to re-gain a place in investor allocations. The key will be to see if the recent price gains persist, or if this is just a "head fake". It is safe to say that if stocks struggle through the early part of this year, bonds should benefit and a long term change in trend will be confirmed:
Another key area in flux is the state of emerging markets. Notable weakness in January has caused this group to really deteriorate. It now stands ready to crossover into a clear "sell" mode, and, like bonds on the "buy" side, is at a critical make or break moment:
While most investors here focused on the new Fed regime and upcoming corporate earnings, the real market moving events for the month occurred in faraway locales like Turkey and Argentina.
In Turkey, the all-important NATO ally has grappled for years with a resurgent Islamist leaning government that has been trying to undermine the "secularist" military and judiciary. Late last year, a corruption scandal erupted which exacerbated the tension between opposing sides. Investors voted with their feet as many believe a totalitarian regime is in the making. The Turkish lire tumbled almost ten percent in January, and their central bank was forced to raise its overnight interest rate from 8% to 12% to keep capital from fleeing.
Meanwhile, habitual crisis manager Argentina saw its currency collapse in late January as its citizens, weary of broken promises and a wrecked economy, sold pesos for dollars at a record rate, forcing an official devaluation of the peso, and causing prices to skyrocket:
Argentina's President Kirchner blamed foreign "vultures" for their economic meltdown as power cuts hit Buenos Aires and goods vanished from supermarket shelves.
Other former emerging market darlings like South Africa and Hungary saw big wobbles in their currency. The Japanese yen, which has been aggressively driven lower by its central bank over the past year, paused in January and was another huge source of indigestion for markets.
Geo-politics has also re-emerged as a more urgent threat. As the world gears up for the Winter Olympics in Russia, the growing civil unrest in the Ukraine has the potential to upstage the Sochi festivities. The "Orange Revolution", which the world had left for dead, was violently revived by the scrapping of an EU accord in favor of a Russian bailout last November. The people, as usual, were not consulted, and they appear to have no interest in returning to a permanent Russian bear hug. Some think civil war is unavoidable.
Similar stirrings are occurring in Thailand, as citizens protest the corrupt rule of the Prime Minister. They have occupied government buildings and brought the country to a stand-still.
The theme is the same everywhere: entrenched politicians refuse to heed the call of the people for reform against corruption and the status quo. It's an age old story, but the pendulum appears to be swinging back towards more protests and rising conflict, and this time it's not just in the usual places like Damascus, Bagdad, and Cairo. That's not a good mix for local markets, and it will make investors seek safety and liquidity. US stocks and bonds, along with gold, will be at the top of that list.
In the U.S., the FOMC met on January 29th and said farewell to Ben Bernanke, as well as announcing more "tapering" by cutting back by $10 billion a month its purchases of bonds. They reiterated their view that the economy was slowly improving, and that inflation remained exceptionally low. As usual, they reminded markets that they intended to keep rates low for an extended period. Nothing new and no surprises in this FOMC announcement.
As we move into February, all eyes are on Janet Yellen, the new Fed Chairman. Being the new kid on the block, it wouldn't be surprising to see her tested by markets or other central bankers. With currencies already in flux and market volatility rising, the stage appears to be set. But she's been training for a long time, just like our Olympians, who are poised to bring home a record amount of "gold" this month. We wouldn't bet against the U.S. in either arena!
Thank you for sharing some of your day with us. We look forward to sending you our Journal next month.
©2014 Stratford Advisors, Inc. All Rights Reserved.
This publication is intended solely for information purposes and is not to be construed, under any circumstances, by implication or otherwise, as an offer to sell or a solicitation to buy or sell or trade in any securities herein named. Information is obtained from sources believed to be reliable, but is in no way guaranteed. No guarantee of any kind is implied or possible where projections of future conditions are attempted. In no event should the content of this market letter be construed as an express or implied promise, guarantee or implication by or from Stratford Advisors, Inc., or any of its officers, directors, employees, affiliates or other agents that you will profit or that losses can or will be limited in any manner whatsoever. Past results are no indication of future performance. All investments are subject to risk which should be considered prior to making any investment decisions. The firm may hold for its clients, Principals or employees, positions in any securities mentioned herein, and may buy or sell such securities at any time without prior notice.