In an announcement Wednesday, the chairman of the National Development and Reform Commission lowered the official target for growth in China for the first time in decades. Xu Shaoshi guided expectations for gross domestic product down from 7 percent to a range of 6.5 to 7. This lower threshold comes at an awkward time for Beijing as fixed investments and industrial activity cool. While all indications continue to support the case for rising household consumption, a maturing cycle shifting towards greater dependency on internal demand presents near-term hurdles. Xu also reiterated earlier comments from officials that reining in corporate excesses will be a priority in the year ahead. As millions of urban migrant workers complete their journey home to rural regions for the Lunar New Year, many will report fewer jobs and lower wages. For leaders in Beijing, managing expectations of a populace conditioned to expect hypergrowth has become more difficult.
Bank of Japan to investigate possible leaks. On Wednesday, Bank of Japan Governor Haruhiko Kuroda spoke before parliament and addressed concerns that news of the central bank’s historic shift to negative interest rates last week was revealed to media sources ahead of the official announcement. A report by Nikkei new service ahead of the announcement Friday spurred a sudden move by the yen versus other major currencies.
Ukraine economy minister resigns after making graft accusations. Aivaras Abromavicius, an outspoken advocate for reform, stepped down as Ukraine’s minister of the economy Wednesday claiming that his attempts to improve transparency had been stymied. In comments as he stepped down, Abromavicius made accusations of rampant corruption within the embattled nation’s government. Prime Minister Arseniy Yatsenyuk’s administration has seen its approval rating collapse in recent months as unresolved conflicts with pro-Russian separatists have contributed to a major economic crisis.
Merck earnings beat estimates but guidance lowered. Fourth quarter financial results announced by Merck & Co. beat consensus estimates at $0.93 per share for the period but lowered 2016 guidance to the low end of the prior stated range. The lower expectations were driven in part by disappointing sales for diabetes treatment Januvia, the firm’s top selling product by revenues generated.
Yahoo! seeks potential buyers. Fourth quarter results were announced by Yahoo! Tuesday with earnings in line with consensus analyst estimates. In addition to announcing a fresh round of layoffs, management discussed strategic options in coded language that many investors interpreted as a signal that the company may seek to sell all or a portion of its non-Alibaba assets. To date, the controversial tenure of CEO Marissa Mayer has proven to be frustrating for major holders.
PBOC lowers the mortgage bar. In a statement released Wednesday, People’s Bank of China officials announced that the downpayment for first-time buyers applying for mortgages has been relaxed from 25 percent to 20 percent. Second-home buyers will see the upfront commitment reduced from 40 percent to 30 percent. The new rules will not apply in urban markets with higher-price regimes such as Shanghai and Beijing.
Daily Agenda: The Path of Least Resistance
The open-ended question for investors today is whether January has set the tone for the market for the rest of the year. Historically, volatility and down markets have usually followed the path set by the first trading month, but not always. While last week’s equity market performance helped balance a few nerves, the downtrend set earlier in the month brought the year-to-date returns for both the S&P and DJIA down about 5 percent. Granted, investors are worried that this past month may signal the beginning of a bear market, and with a little digging into the weeds we can see that any market strength last year was really carried by only a handful of companies, which only serves to emphasize the weak breadth. To date, more than 40 percent of the S&P 500 benchmark stocks are already off 20 percent from their highs. One counter to the continuing “bear argument” is that while cheap can become cheaper, the market is relatively oversold in a number of sectors, industries and individual companies. Unfortunately, until there is some stabilization in oil prices (stability being the key word), and China resolves its “monetary flight,” and the dollar solves its “dollar-might,” and investors back off their recession fears, the drivers for any market bounce are fairly limited and emotionally based. In the meantime, the reader may take heart that, according to S&P Capital IQ, in one third of the years since 1945, shares in the S&P 500 hit their yearly lows in the first month of the year.
Tom Stringfellow is the president and chief investment officer of Frost Investment Advisors in San Antonio, Texas.
