Outlook for 2016
In my opinion the six year Bull market run is pausing but not over. China is moving from a manufacturing economy to a service-consumer economy. This has led to a growth slowdown and significant market dislocations. Still, for the fourth quarter GDP China just put in a 6.8%, about 10 basis points below expectations. Remember this is on a much bigger base than when China’s economy was growing at a rate of close to 10%. There is currently little evidence of an impending recession in the United States. The U.S. unemployment rate was recorded at 5 percent in December (unchanged from November and the lowest level since April of 2008) and the U.S. Fed just raised interest rates. Europe is still showing signs of slight growth as well.
At 16.8x forward earnings the S&P 500 is not cheap, but not expensive either. Only 20% of the 10% corrections lead to bear markets (declines greater than 20%). If this happens it is primarily due to a recession occurring, of which there is little evidence underway.
Are we washed out or are we getting there? The TSX is down about 25% from its high two years ago. The TSX Venture (very commodity centric) is down 85%! Over 70% of the stocks on the S&P 500 are down 20% or more and about the same number are below their 200 day moving average lines. These are pretty extreme readings on the downside. A lot of stocks have had considerable correction, which is causing investors to have a miserable time. These are the common ingredients for a large upward move, not a crash.
A lot has been made about the market decline on the first 10 trading days of the year which had the S&P 500 down 8%. This was the worst observation in recent history. The good people from Bespoke ran the worst 10 days as a “Top 10” list. Guess what? It tells us nothing about the rest of the year. Half those times after the big decline the market was down and the other half it closed up on the year.
The wild card is China. Investors are terrified that the numbers are “not to be trusted”. Guess what? The same numbers and processes were in place on the way up too. China has major international reserves and substantial room to cut rates to continue to stimulate their economy. They will do what it takes.
We have now had two periods in the past twelve months where the S&P500 has had a 10% correction. I believe the complacency period of the past several years is now over. Expect more volatility going forward which in itself is not necessarily a bad thing.
The super bears on the market are out of the closet and are big time on TV. And, as when markets are down and falling, their arguments seem compelling. Investors always rationalize what they see going on at the exact moment of time they are in. I would stay invested in long-biased strategies empathizing quality and dividend paying equities. I don’t think it will be a banner year for stocks but I do not believe it’s going to be a nasty bear market either. The U.S. growth engine is sputtering because of the strong U.S. dollar headwind on corporate earnings, but are still expected to grow approximately 6%. What stuck with me recently is the old expression that is tried and true: “Volatility is a friend to those that understand the value of a business and the enemy of those that don’t”.
It’s a good time to take note of what you own and migrate to companies that have solid franchises and attractive valuations.
Jim Gellman, CFA
Director, Wealth Management
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