Latest posts by Aldo Ceccarelli, CFA (see all)

Dancing feet

Despite market volatility stemming from events in China, there’s sound reason to be optimistic, according to Chief Portfolio Strategist Dr. Brian Jacobsen.

Aldo Ceccarelli: I’m Aldo Ceccarelli, and you are On the Trading DeskSM. There’s an interesting interplay between oil and the financial markets—one that Dr. Brian Jacobsen characterizes as an ugly dance. Brian joins us to explain. Brian, welcome.

Brian Jacobsen: Thanks for having me.

Aldo: For starters … why an ugly dance between oil and the financial markets—explain what’s ugly.

Brian: Lower oil prices led to a sell-off in energy stocks. Energy stocks are a shadow of what they used to be. In 2013, energy made up 11% of the S&P 500 Index. Today, it makes up closer to 4% to 5%.

The market drops haven’t just been oil and energy, though. It’s part of a bigger narrative around growth.

China has been the biggest importer of many commodities, including oil, for years. A slowdown there affects global economic growth. For oil markets, it affects the outlook for oil demand. You also have a lot of oil supply. Supply concerns have been increased due to sanctions against Iran being lifted and the continued lack of action by OPEC to cut production.

Clock striking midnight on New Year's Eve

What mood are the markets in? Dr. Brian Jacobsen discusses the big economic items for the month ahead.

Aldo Ceccarelli: I am Aldo Ceccarelli, and you are On The Trading Desk.

On behalf of everyone who brings you this program each week, we wish you a Happy New Year. And a Happy Birthday to us! This edition kicks off our 10th season. Thank you for sticking with us all along, and we welcome those of you who are just finding us.

This week, we’re wondering what mood the markets are in and what’s ahead for January. Joining us is Dr. Brian Jacobsen, chief portfolio strategist with Wells Fargo Asset Management. Brian, welcome.

Brian Jacobsen: Thanks for having me back. And Happy New Year to you!

Aldo: Thanks! How about a brief assessment of the mood the markets are in?

Brian: Well, you started off saying Happy New Year, and I think that’s only part right—they certainly didn’t seem all that happy, at least for the first trading day. Seems like market participants were a little worried about some data coming out of China and the United States, and we really weren’t off to a good start with the new year.

Road leading to horizon

Dr. Brian Jacobsen recaps the Fed’s rate-hike decision and what it means for investors.

Aldo Ceccarelli: Let’s start by recapping what the Federal Open Market Committee decided to do on December 16.

Brian Jacobsen: In one of the best-telegraphed policy moves in modern monetary memory, the Fed actually moved three rates: Not only did it move the target range for the federal funds rate, it also moved the interest paid on bank reserves and moved the interest rate on overnight reverse repurchase agreements. This is all part of a plan to push short-term interest rates a little higher. I think more important than the slight tap higher in rates was the Fed’s message that future hikes will likely be gradual, so short-term rates won’t likely be skyrocketing anytime soon but instead kind of going this tap-tap-tap higher route. So, shaping expectations about what, and over what time frame, the Fed will do things has a much bigger impact on economically relevant rates than any single move by the Fed.

Aldo: Can you help investors make sense out of the market reaction after the announcement?

Brian: The initial response was as we expected. Yields and the dollar moved up in anticipation of the move and then reversed right afterward. Stocks moved up in the wake of the announcement because the Fed is still being very accommodative. It also implied it would be gradual, and it endorsed the view that the economy was healthy. Now, the next couple of days were a little rougher. I think a lot of it was actually just profit-taking. You also had a continued slide in oil prices, perhaps reflecting a less sanguine economic outlook than what the Fed provided.

Aldo: What do you think about the longer-term outlook?

Gas pump

Dr. Brian Jacobsen recaps the recent OPEC meeting and lends a sense of opportunity in the current environment.

Aldo Ceccarelli: Let’s start by putting the December 4 meeting of the oil producing and exporting countries into perspective.
Brian Jacobsen: Thanksgiving 2014 OPEC sent the oil markets tumbling when it announced it wasn’t going to restrict supply. It was an attempt to protect market share. Oil prices have dropped precipitously and the oil cartel is beginning to splinter a bit. Everyone in the cartel wants lower output to drive up oil prices, but nobody wants to be the one to lower their own output. They want everybody else to pay the price. It’s a classic problem that destabilizes cartels. At Friday’s meeting, OPEC announced it was keeping production running at its current pace, basically abandoning its $30 million barrel per day quota. And they’ve been producing more than that anyway so they’re just basically admitting reality. Some portray this as effectively creating a bit of a free for all with production, but that’s not quite right. They are just trying to figure out how to recalibrate their quota with Indonesia joining the cartel and Iran ramping up production with sanctions against them being lifted.

Snail in the grass

Could slow be the new fast? Discover global opportunity in a slow-growth world.

Investors who put off international exposure because global growth may be slow may benefit from hearing about secular stagnation. Chief Portfolio Strategist Brian Jacobsen helps us get our heads around this heady topic. Brian, thanks for joining us.
Hi, Aldo. I’m glad to be here.

Let’s first understand what secular stagnation is.
It’s actually a recycled idea. Former Treasury Secretary Larry Summers has brought it back in vogue. The idea of secular stagnation actually originated with the work of Alvin Hansen, who was a Harvard economist. In 1938, he outlined the secular stagnation thesis. He argued that all the growth ingredients had really played out, that growth from technological innovation and population growth were over. His prescription for this disease was chronic and large deficit spending by the government.

And that seems to be the recycled argument today—that advanced economies and some developing economies like China have unfavorable demographic trends and productivity growth has stalled. So the prescription now is large infrastructure investment by governments. So it’s kind of amazing how old ideas never really go away. They just get reused at a later time.


Are you looking in the right places for opportunity? Capital Market Strategists John Manley and Jim Kochan from Wells Fargo Funds Management, LLC, help you focus in this edition of the On the Trading DeskSM podcast from Tuesday, September 29, 2015.

John, let’s start with you. What’s top of mind at this moment?
John Manley: Well, economic strength is top of mind. There are issues in China. Obviously, the economy is slowing. The question is how much and what ramifications that has for the countries around China and then ultimately the United States. I think there’s more concern about a slowing economy than an accelerating one at this point in time. And, actually, I think the more encouraging comments that we got from the chair of the Federal Reserve that rates might go up were greeted, I think, more enthusiastically than they might have been even two or three weeks ago because of that.