When you think about it, investing is a lot like life: some years are great, some less so, but at the end of the day it’s of utmost importance to keep looking forward. In both endeavors we learn from our triumphs and mistakes, and we use that knowledge to keep getting better as we go.
2015 was a lot like 2011: a year when the stock market was rather volatile and did not offer much by way of positive returns.1 The U.S. and global economy grew but earnings felt some downward pressure from the Energy sector;2 the Federal Reserve raised interest rates for the first time in nearly 10 years;3 the Chinese economy started to show signs of slowing; Europe is showing signs of recovery, but remains fragile. Nothing seems alarming or wrong with the global economy – it just has that “middle of the road” feeling.
But it could get better from here. Below, we’ll use charts to take a look at where the markets stand now and how economic growth is shaping up around the world, and we’ll offer some insights as to what might be ahead for investors in 2016. The message overall: stay positive.
Market Overview and Outlook: In Charts!
The S&P 500: markets are inherently volatile, but in 2015 we saw something we hadn’t seen in several years – an actual correction of 10% or more. The last time we experienced that was in 2011, when the market nearly sunk into bear market territory before finishing the year flat. There was a recovery in 2012 with the market up 13%1 - a positive rebound could be the case for 2016 as well.
U.S. Company Earnings: earnings took a dip from late last year as falling oil prices put downward pressure on the Energy sector. The consensus is for a strong rebound in Q4 2015 however, as displayed below. If earnings strength continues into 2016, that could provide a tailwind to equities.
The Federal Reserve and Interest Rates: Janet Yellen’s Fed raised interest rates for the first time since June 2006. Expectations are that interest rates could continue moving gradually higher from here:
For bond investors, that could have some material implications on Treasury and other fixed income prices. As interest rates rise, prices tend to fall (see chart below). Investors with large bond/fixed income allocations may want to review portfolios going into the New Year. Some changes could be warranted:
For equity investors, history shows us that a rising rate environment may not be a bad thing, particularly early in the rate hike cycle. As interest rates move higher over time with the Fed increasing rates many times, there have been instances where the market felt some impact:
Global Valuations: looking at the U.S., Europe, and Emerging Markets, a picture emerges that suggests stocks may be what you would call “fairly valued.” As you can see below, stocks are trading pretty close to their long-term P/Es, though a little bit higher across the board. That is not to say that stocks can’t go any higher from here, but it’s something to keep an eye on in what appears now to be a late-stage bull market.
Get Your Portfolio Ready for 2016
There are a variety of factors that should influence how your portfolio is allocated. Market conditions and fixed income/equity outlooks are a big part of that, but it also depends on what your personal financial goals are – generating income for retirement? Leaving assets to heirs? Preserving capital? And so on.
Our Wealth Managers can help you evaluate your goals against your current portfolio’s allocation, while suggesting ways we believe you can improve your overall management and allocation. To speak with a Wealth Manager today, simply give us a call at 1-800-541-7774 or contact us here.
Sources:
1. J.P. Morgan
3. CNBC
