This past year was difficult, but not disastrous. A weather induced US economic slowdown kicked off the year, and headlines declared a possible messy exit by Greece from the Eurozone. During the summer, a decelerating Chinese economy led to the surprising devaluation of the yuan. This helped trigger a massive drop in the US equity markets during the summer. As the fall began, investors grew uneasy over the prospects of Fed tightening, but then got mad when they didn’t tighten! A late year meltdown in commodities hurt resource-based industries and economies around the world. Geopolitical crises, terrorism, and a bizarre US political backdrop all helped boost uncertainty – never a good thing when it comes to money!
The chief headwind for equities was weak corporate earnings. Not surprisingly, the rising U.S. dollar and falling oil prices hurt the energy, materials, and industrials sectors. Oddly, these same factors failed to lift consumer-oriented and other "energy-using" sectors. The key to determining the direction of equities next year may well be the direction of corporate earnings.
Despite the negativity and uncertainty, the investing world saw several bright spots in 2015. The U.S. economy grew modestly and unemployment declined significantly. The housing and banking sectors improved. Consumer spending remained strong. The federal deficit fell sharply, and equity markets proved to be resilient despite downward pressure. Will next year be dominated by the negatives? Will the positives win? Or will confusion and uncertainty continue?
A few thoughts of ours for what we expect in 2016:
1) US real GDP will remain below 3% and nominal GDP below 5% for the 10th year in a row
2) US treasury rates will rise, but high yield spreads will fall
· This is actually one of the reasons we don’t feel too worried with our fixed income book as we feel very confident that spreads will fall
3) Consumer spending advanced will be partially offset by oil, dollar, and wage rate – leaving us to believe that US earnings will make limited headway in the aggregate
4) Non-US equities will outperform domestic equities
· Though we don’t necessarily believe this after currency hedging!
5) Non-US fixed income will outperform domestic fixed-income
6) Federal budget deficit will rise in dollars and a percentage of GDP
In many ways, 2016 may resemble 2015. We believe we are in the midst of a very long (if slow) economic expansion that should produce choppy returns in most asset classes. Global growth was uneven in 2015, and a major variable will be whether global growth slows or regains traction. Our bet is on the latter. The United States should enjoy an expansion that should not be derailed by modest Fed rate hikes.
Continued policy easing in Europe should help the region rebound. On the negative side, China is likely to slow further, and commodity-dependent emerging economies may struggle. We expect the Chinese economy to stabilize, however, and believe oil is in the midst of a bottoming process. This should mitigate significant commodity-related damage. On balance, we believe the global economy should accelerate modestly in the coming year.
Equity markets have been resilient but earnings growth must improve for prices to advance. As long as global growth increases, earnings should recover. Fortunately, if profits expand even modestly, valuations are unlikely to be pressured. The bull market is maturing, which means gains will likely slow down (as occurred in 2015), but we expect equities to outpace bonds, which may be hurt by rising yields.
Equity leadership should shift from secular, stable growth areas toward sectors primed to benefit from improving economic growth and rising bond yields. At the same time, non-U.S. equities could reasonably make headway as global growth accelerates and fears associated with Greece and China recede. The key risks to our outlook include slowing growth in China, commodity pressures, policy errors by central banks, widening credit spreads and unpredictable geopolitical developments.
Overall, we think 2016 may present difficulties for investors, but there are reasons for optimism. If global economic growth broadens and improves, that could allow corporate revenues and earnings to strengthen. Such a backdrop, combined with still-low inflation and still-easy monetary policy, should allow equities to improve further.
The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Any opinions are those of David Abuaf and not necessarily those of RJFS or Raymond James.
Any opinions are those of David Abuaf and not necessarily those of RJFS or Raymond James. Expressions of opinion are as of this date and are subject to change without notice. The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation.
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