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Sather Financial Group

120 E Constitution St
Victoria, TX 77901

(361) 570-1800



 

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Strap On Your Seatbelts…It’s a Bumpy Ride

2016 First Quarter Commentary

Just in case you forgot, the financial markets are volatile. And if you welcome volatility, then you loved the first quarter of 2016. From the beginning of the year to February 10th, both the Dow and the S&P 500 had lost more than 10%. The investors dilemma: Sell and run for the hills, buy more or hang in there? Hopefully, it was one of the last two choices. By the end of the quarter both the Dow and S&P 500 had retraced lost ground and managed a slight gain for the quarter.  As the chart to the right shows, this certainly isn’t the first time we have experienced volatility of this nature and it won’t be the last!

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As the oil market recovered from a low of $27 per barrel, so too, did the stock markets. After a precipitous drop in January, the price of crude rebounded to the $40 level.  During the quarter, the US Dollar remained quite strong relative to other world currencies.

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As Janet Yellen, Federal Reserve Chair, admitted the economy is weaker than anticipated. At the same time, Yellen said retracted previous Fed statements that short term interest rates would be increased four times in 2016. Instead, Yellen said, don’t expect much—were in a holding pattern. This did not surprise us as we had commented at the end of 2015 that the economy was far too weak to warrant significant increases in rates. Subsequently, the 10 Year Treasury yield fell and investors pushed money back into stocks. As we have written about before, we continue to be mired in a TINA market…. There Is No Alternative….but stocks.

 

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Not too surprisingly, there continues to be weakness in the energy and materials sectors. This is showing istself in both revenues and earnings. However,  other sectors  are doing much better—often ones that benefit from low energy prices. 

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Although the price of energy dropped, it has not stopped people from moving to Texas.  Eight of the top 20 counties with the largest population growth last year were in Texas. Texas payroll gains have held steady despite oil-related cutbacks in positions, and the state's jobless rate of 4.5% is better than the national average of 4.9%, according to the Labor Department. 

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It is also important to recognize that the data being cited for best population growth is as of July of 2015. By the time that information is updated through July 2016 it may reflect a less upbeat picture.

Despite this, through January 2016 the Victoria, Texas area has lower unemployment than it did two years earlier. This tells us that Texas, and the Victoria-area, are both more economically diversified now than they were during the 1980 to 1985 time frame.

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In fact, the economy has been so strong in Texas that both Austin and Dallas share the dubious distinction of being some of the least affordable locations to reside. Having spent time in both recently, the appearance is that both cities are booming and San Antonio is not far behind.

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Conversely, the economy in California continues to suffer and with it, unemployment remains well above the national average. We find it ironic that at a time when jobs are so hard to find, the State of California is mandating a $15 per hour minimum wage. It might be wise for the California politicians to take Economics 101; when you start inserting government price controls, jobs and the economic benefits that accompany them will react accordinly. In the process, they will leave, be replaced by robots or are outsourced. In the end, it is the low end worker that is most affected by decisions of this nature. On the national level the jobs picture continues to be difficult. Although the official “unemployment” level appears to be low at 4.9%, there are many people who are excluded from this figure.

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Furthermore, just because unemployment is low does not mean that people are finding good quality jobs. 

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Currently, the civilian population (age 16 or older) that is in the workforce is finally, after seven years of decline, showing some signs of improvement. At the same time, claims for jobless benefits are on the rise. It may be that they are under-employed, in which case they are apt to job hop. Or, they are seasonally employed, in which case they are apt to quit or get laid off.

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At a minimum, it is a difficult investment market. The first quarter provided enough volatility which offered some welcome entry prices to take new positions or add to existing positions.

However, with the Federal Reserve stoking the fires of the stock market as a whole we find ourselves looking to liquidate a variety of positions in favor of cash or to redeploy into cheaper assets.

Lastly, I hope you will reserve the evening of Thursday April 21st as we celebrate anniversary #17 since our little firm was established. Come join us for something cool to drink and a snack or two. As is tradition, we will see you at Fossati’s (302. S. Main) starting at 5pm. Without truly wonderful clients, we wouldn’t have a reason to exist—THANK YOU! We are looking forward to many more.

Sincerely,

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