Federated Investor's Senior Equity Strategist, Linda A. Duesse discusses oil prices, earnings, election years, the Santa Claus Rally (SCR) and more in her 2016 Outlook.
"As an indecisive year draws to a close —the S&P 500 crossed the flat line a in 2015—the market
record 26 times remains in a difficult position. While the seasonal backdrop is certainly supportive through January, daily, weekly and monthly momentum indicators are not oversold and continue to weaken. Individuals continue to dump equity funds, market breadth remains narrow, the rally off the August lows failed to generate the internal surge often seen in the early innings of a durable advance, and credit conditions are still suggesting caution, with high-yield spreads ending 2015 at their highest level in nearly 3 years. The macro backdrop isn’t great either. Global growth is slowing, while in the U.S., real GDP remains stuck in a 2%-2.5% rut. Ironically, the ability of companies to make money in this environment may be supportive of this frustrating norm. While the top line of developed-market companies has been rising much slower than in previous recoveries, profits have grown at a very decent pace, a result of operating leverage that has grown steadily over the last quarter century. In other words, companies have learned to generate profits in a low-growth environment and have been successful at expanding margins. One of the key reasons, Empirical Research says, is the improved use of capital, i.e., with returns on capital improving, margins can improve without the capital intensity typical of past cycles. A consequence is that a capital-light business model comes with a capital spending-light recovery, which means the accelerator effect on GDP from that spending will be muted and the recovery is destined to remain sluggish.
