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Economy is not quite warm enough to satisfy

Week ending January 22, 2016

Last week was the first positive week of 2016 with the S&P Global 1200 up a modest 1.46 per cent and the US S&P 500 up 1.43 per cent. Year to date both indices are down — Global was down 7.56 per cent whilst the US index was down 6.61 per cent. However, as we start this week, the markets continue to sell off.

We beat the indices by a significant margin last week despite having in excess of 20 per cent in cash in our portfolios. We see this weak market as an opportunity to average down costs.

Financial channel commentators expressed a dismal outlook yesterday despite earnings reports of US companies that are beating expectations. One commentator attributes the lower oil prices to lower demand and insists that this confirms the global economy is slowing. (What about excess oil supplies?)

The US Leading Economic Indicators fell for the first time in three months in December, factory orders were lower, and building permits slipped. Rising jobless claims, falling stock prices, and lower consumer confidence pulled the index lower. These are the first indicators suggesting weakness following months of very encouraging economic data. Would the Fed have raised interest rates in December if they had seen these indicators before? Maybe not. What is likely now is that the Fed will not raise interest rates for some months to come.

Other central bankers remain accommodative. Last week in Davos, ECB president Draghi hinted strongly that further easing would come from his central bank. Chinese and Japanese policymakers expressed similar intentions.

We are Goldilocks investors in an economy that is not quite warm enough to satisfy. Cash raised in our portfolios gives us the ability to purchase great companies at lower prices and increase positions in those stocks which have not broken down from their upward trend lines despite this market correction.

Robert Pires is the chief executive officer of Bermuda Investment Advisory Services Ltd. He can be contacted at rpires@bias.bm