Monthly Stock Market Report – January 31, 2015

Stock Market Volatility Not for the Faint-Hearted

Stock Market ReportU.S. stock market action during January 2015 was very volatile, with 14 of out 20 trading days resulting in up or down moves of around 1% in the S&P 500 Index. In fact, January 2015 marked the most volatile month in the last 5 years. Investors could not make determinations as to which direction stocks were heading. “Down” days were driven by the continuing crash of oil prices, which reached $45/barrel (a drop of over 50% in one year). “Up” days were sparked by announcements of further easing by the European Central Bank. In the end, however, the disappointing U.S. Gross Domestic Product (GDP) gain of only 2.6% (3.2% was expected) in the 4th quarter of 2014 and a mixed earnings outlook resulted in a 3.1% loss in the S&P 500.

As I Predicted – But Stick with Allocations AND…

In my December 2014 Report, I predicted that a 3-5% mini-correction could occur in January, and the U.S. stock market unfortunately fulfilled my prediction. Specifically, since the S&P 500 hit its historic closing high of 2,091 on December 29, 2014, it has corrected 4.6% to its close of 1,995 on January 30, 2015.

For long-term investors who follow any one of the 5 models in our TSOA retirement model portfolios [which use mutual funds and/or Exchange-Traded Funds (ETFs)], it is best to do nothing. Stick with the asset allocations as outlined in our 5 models even if the rest of 2015 becomes as volatile as the first month of the year

…Sell Some Stocks to Raise Cash

However, if you own some individual stocks with nice profits, it may be wise to sell a few shares to raise some cash. And when better (lower) prices occur later in the year, you can buy back those shares at a lower price. This action will also reduce your risks.

We suggest selling some individual stocks in the following categories:

  • Energy-related companies adversely impacted by the continuing glut of cheaper oil (even if we get some short-term oil price rallies in the coming months)
  • Companies with significant export business and currency risks due to the strong dollar
  • Over-valued stocks with high Price/Earnings multiples (P/E ratios)  subject to disappointing earnings

Stocks in these categories could command lower prices in the months ahead and may well be better buys later this year.

“Consumer-Powered” Stocks are Better Investments Now

I believe the consumer, especially the U.S. consumer, will be the primary driver of higher profits in the coming decade. As such, I will soon share with you more investment ideas for “consumer-centric”  or “consumer-powered” businesses  that have best-selling products and/or services which directly impact the consumer. These broadly defined “consumer-powered” sectors may include airlines (e.g., Delta), credit card companies (e.g., MasterCard), entertainment (e.g., Disney), consumer electronics (e.g., Apple), healthcare (e.g., United Health), money managers (e.g., T. Rowe Price), travel-related companies (e.g., Expedia), restaurants (e.g., Panera) and others. In fact, all of the stock picks on our FunStocksIndex can be considered “consumer-powered” stocks.

Since the U.S. consumer generates 70% of the U.S. economy, it makes sense to focus on these broad sectors of the investment world for better future investment gains. However, there may be periods when the consumer enters a period of financial trouble. That could indicate a recession is on its way, and it would behoove us to implement a less risky investment allocation during such “consumer-unfriendly” periods (e.g., high unemployment, high inflation, high interest rates, etc.). Stay tuned.

Be sure to sign up for a free subscription to alert you of any updates.

Good Investing,

Jim Tso

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