TGIF! December 11, 2015

It was a tough week on Wall Street.  The Bulls are licking their chops as this violent price action has raised serious questions about the traditional year-end Santa rally.  2015 has been anything but conventional.  The underlying health of the overall Market has been weak all year, masked by a handful of stocks that soared, while the majority of them fell.

The Fed meeting next week will be its most important session since the Financial Crisis.  It is all but confirmed that the first interest rate hike in a decade is coming.  The Market is understandably tense leading up to it.  We think it’s important that the Fed gets in front of this issue before it gets trapped underneath a bigger global crisis.  We felt all along that September was the right time to begin liftoff and the Fed blew it by pushing it out till now. A 1/4 point increase won’t do permanent damage and will actually provide some needed psychological benefit.  December 16 will be a big day for 2015.

Credit markets have tightened significantly as risks continue to rise. The Junk Bond Market is experiencing tremendous distress.  The commodity space is ground zero for the carnage.  Junk Bonds trade more like stocks because they’re higher risk, lower quality speculative investments.  It’s usually a very good barometer of the underlying health of the overall Market.  Wall Street calls it the high-yield Market, which is easier to promote than “junk”.  It is what it is.

It’s been a record year for mergers and acquisitions.  Companies have been scrambling to lock in deals before interest rates move higher.  Growth has been hard to come by this year.  Consolidation has been a theme to cut costs and scale business models. The thinking here is, if you can’t grow organically, then you need to buy growth and reduce internal overlapping costs to enhance profitability.  In addition to M&A, many companies have been buying back their own stock.  This is typical behavior for a maturing Bull Market.

We remain in defensive mode, but have been picking up beaten-down bargains when we see them.  We still think there’s plenty of runway ahead for this Bull Market, but expect more choppy action ahead.

Have a nice weekend.  We’ll be back, dark and early on Monday.

By: Mike Frazier

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