The first few trading days of 2016 have seen U.S. equities put in their worst performance to start a year ever and their worst week since 2011. So much for all the talk that the Santa Claus rally would last for the first few days of the New Year. U.S. and global equities have been pressured by concerns about the Chinese economy and weakness in the Yuan.
The weakness in stocks comes despite a very solid December employment number, which exceeded even the most optimistic expectations. The economy added 292,000 jobs compared to an expectation of 201,000. The one weak point of the reports was that wage growth remains muted as average hourly earnings were unchanged versus an expectation of 0.2%.
I remain cautious on U.S. equities in the near term and prefer to sell any rallies. I expect stocks to test the low of 1867 set by the S&P 500 Index in August 2015. Despite the potential for flight to quality in U.S. treasury bonds, I also remain cautious and look to sell the 10 year treasury around 2.00%. The potential for the Chinese central bank to continue to sell Treasury bonds adds to my caution about Treasury yields.
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