Market Digest – Week Ending 1/16
Market volatility increased as investors attempted to determine if falling energy prices is a good or bad sign for the economy. The Swiss National Bank unexpectedly ended a peg of the Swiss Franc to the Euro, sending the Franc upward and shock waves through the currency markets. Some currency brokers and investors were wiped out. Ultimately, stocks fell every day except Friday and the S&P 500 finished down 1.3% for the week. International stocks fared better, posting a 1.5% gain despite continued losses in the Euro as investors anticipated a stimulus package from the ECB. Bonds and gold rose. Oil rallied Friday to finish about even for the week.
S&P 500: 2,019 (-1.3%)
FTSE All-World ex-US: (+1.5%)
US 10 Year Treasury Yield: 1.82% (-0.14%)
Gold: $1,195 (-0.0%)
USD/EUR: $1.156 (-2.4%)
- Monday – Hackers claiming to be aligned with the Islamic State extremist group briefly took control of the U.S. Central Command’s primary Twitter and YouTube accounts.
- Tuesday – The Euro hit a 9 year low against the dollar as investors anticipated a massive stimulus package by the ECB
- Tuesday – The U.S. reported a $2 billion budget surplus for December, and a $488 billion deficit for the full year, the narrowest since 2007.
- Wednesday – Five year bond yields in Germany, Switzerland and Finland fell below zero.
- Wednesday – Google announced it would release a “modular” cellphone in Puerto Rico, hoping to change the way consumers think of smart phone hardware.
- Wednesday – JP Morgan reported disappointing earnings and CEO Jamie Dimon said there is too much regulation on banks.
- Thursday – Google announced it will take Google Glass back to the lab and plans to release a more consumer-ready version later this year.
- Thursday – India surprised markets with a rate cut to 7.75%. Its stock market rose 2% and the rupee gained against the dollar.
- Thursday – The Swiss National Bank unexpectedly ended a peg with the Euro, sending the Franc soaring and causing disruption in capital markets around the world.
- Friday – The Supreme Court said it will decide if the Constitution gives same sex couples the right to marry, in what may solidify the right for gay unions nationwide.
It was a wild week. The S&P experienced a 2.2% intraday decline on Tuesday and gained 1.3% on Friday. Oil prices finished the week relatively flat, but moved 3% or more on four of the five days.
Meanwhile the Swiss National Bank shocked investors by removing a peg to the Euro. Several currency brokers took a huge hit, and some were forced to close due to retail investors who had made heavily leveraged bets on the Franc and were unable to cover the losses. It wouldn’t be surprising to also see a lifeless hedge fund or two float to the surface. Because of the relative stability of major currencies, some brokers allow leverage of up to 100x.
It is a good example of the dangers of leverage. Most normal people don’t speculate on leveraged currency, and if you do you need to ask yourself what makes you think you have an advantage at it. But it happens a lot with stocks. The same pattern repeats in every market cycle. Stocks rise for years and people get comfortable, then greedy. Usually, the Fed is slow to raise interest rates so borrowing costs seem low. As long as stocks keep rising, leverage feels fantastic. But like some things in life, it is hard to stop before the ride turns ugly. If you own stocks and do not leverage, over a long period of time you should make money. With leverage, if you time it right you can do fantastically well. But you open the door to the possibility that you suffer losses which can’t be regained.
Some forms of leverage are good. It makes sense for many to have mortgage interest to stay invested in the stock market. And governments should often run deficits funded by debt to keep the economy growing. But if you are an everyday investor who has margined their brokerage account to seek more gains, just make sure you are comfortable with a wide range of outcomes.
The unexpected happens more than is expected.
Craig Birk, CFP®
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