Happy New Year! As we welcome the arrival of a new year it is important to look back on where we have come from. How did major markets perform in 2015? What can and should we expect in 2016?
2015 Results
Equity Indices
Dow Jones Industrials: Down 398 or 2.3%
S&P 500: Down 14.96 or 0.70%
Nasdaq: Up 271.36 or 5.6%
Russell 2000: Down 68.81 or 5.9%
Commodities
Oil: Down 16.40 or 36.6%
Gold: Down 125.90 or 11.2%
Copper: Down 0.69 or 28.1%
10-Year US Treasury
2.2694% yield up 0.10% or 4.5%
Currencies
Euro/US Dollar: Down 0.09 or 8.3%
USD Index (DXY): Up 8.32 or 808%
Summary
2015 proved to be a challenging one for money managers and all investors. Between a strong US dollar and the weakening commodities complex, returns were hard to come by as companies struggled to post positive earnings. Most asset classes were down. It paid to be diversified in overseas markets as Europe, Russia and Asia outperformed. Investors spent the entirety of 2015 fretting over the timing of the Fed's first rate hike in 8 years. The Fed's first rate hike finally came at the December meeting.
2016 Outlook
If the first trading days of 2016 are any indication, it could be another rough year for investors. Many pundits are "spinning" a bullish story based on historical performance following flat years. Last year the "story" was bullish based on the 3rd year in the presidential cycle AND positive returns during years that end in 5, like 2005 or 2015. Bulls always need a "story" or a yarn to spin and they keep churning them out. Maybe they should just stick to fundamentals, the markets do. Earnings performance are still the most reliable metric for market performance even if the market may stray away briefly.
So, what can markets look forward to in the new year?
The Fed: the market will watch the Fed closely for any indications on future rate hikes.
China: the world's second largest economy influences many economies, particularly emerging markets. The US fears further currency devaluation and its effects.
Commodities: how low can oil go? The big danger is the collapse of an entire network of derivatives connected to the commodity.
Corporate Earnings: earnings growth has slowed as well as top line revenue growth. Can stocks go up in the face of declining earnings growth?
Geopolitical Concerns: Saudi Arabia v Iran row, N. Korea testing an H-Bomb. Is North Korea a black swan?
Forecast
Given the weakness in the global economy and gradual Fed tightening, US corporate earnings will suffer dragging down stock values with them. A corresponding flattening of the yield curve as short term rates rise while long term rates sniff economic weakness and fall. The outlook for the S&P 500 should remain muted ending the year where it started the year, 2050. 10-year Treasuries will remain flat and end the year where they began the year around 2.25% with little catalyst to drive them higher as the Fed moves only impact the short end of the yield curve. Commodities such as oil will be range bound and trade between $20 and $40 ending the year at the higher end of the range as optimism improves as the year comes to a close. Gold will continue to be a safe haven and end the year higher than current levels. Copper will remain range bound as emerging market demand remains soft.
2015 Results
Equity Indices
Dow Jones Industrials: Down 398 or 2.3%
S&P 500: Down 14.96 or 0.70%
Nasdaq: Up 271.36 or 5.6%
Russell 2000: Down 68.81 or 5.9%
Commodities
Oil: Down 16.40 or 36.6%
Gold: Down 125.90 or 11.2%
Copper: Down 0.69 or 28.1%
10-Year US Treasury
2.2694% yield up 0.10% or 4.5%
Currencies
Euro/US Dollar: Down 0.09 or 8.3%
USD Index (DXY): Up 8.32 or 808%
Summary
2015 proved to be a challenging one for money managers and all investors. Between a strong US dollar and the weakening commodities complex, returns were hard to come by as companies struggled to post positive earnings. Most asset classes were down. It paid to be diversified in overseas markets as Europe, Russia and Asia outperformed. Investors spent the entirety of 2015 fretting over the timing of the Fed's first rate hike in 8 years. The Fed's first rate hike finally came at the December meeting.
2016 Outlook
If the first trading days of 2016 are any indication, it could be another rough year for investors. Many pundits are "spinning" a bullish story based on historical performance following flat years. Last year the "story" was bullish based on the 3rd year in the presidential cycle AND positive returns during years that end in 5, like 2005 or 2015. Bulls always need a "story" or a yarn to spin and they keep churning them out. Maybe they should just stick to fundamentals, the markets do. Earnings performance are still the most reliable metric for market performance even if the market may stray away briefly.
So, what can markets look forward to in the new year?
The Fed: the market will watch the Fed closely for any indications on future rate hikes.
China: the world's second largest economy influences many economies, particularly emerging markets. The US fears further currency devaluation and its effects.
Commodities: how low can oil go? The big danger is the collapse of an entire network of derivatives connected to the commodity.
Corporate Earnings: earnings growth has slowed as well as top line revenue growth. Can stocks go up in the face of declining earnings growth?
Geopolitical Concerns: Saudi Arabia v Iran row, N. Korea testing an H-Bomb. Is North Korea a black swan?
Forecast
Given the weakness in the global economy and gradual Fed tightening, US corporate earnings will suffer dragging down stock values with them. A corresponding flattening of the yield curve as short term rates rise while long term rates sniff economic weakness and fall. The outlook for the S&P 500 should remain muted ending the year where it started the year, 2050. 10-year Treasuries will remain flat and end the year where they began the year around 2.25% with little catalyst to drive them higher as the Fed moves only impact the short end of the yield curve. Commodities such as oil will be range bound and trade between $20 and $40 ending the year at the higher end of the range as optimism improves as the year comes to a close. Gold will continue to be a safe haven and end the year higher than current levels. Copper will remain range bound as emerging market demand remains soft.
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