This market update is intended for our valued clients to address domestic and global financial events and we encourage you to refer us to a family member or friend who may benefit from a conversation with us.
As you have no doubt heard from the financial press and media, we’re off to the worst beginning of a year in equities in stock market history. Putting that in perspective, at the time of this writing, January 12, 2016 the Dow Jones Industrial Average is hovering around 16,500, roughly the same levels we saw in August 2015. Not so bad really when put into the proper perspective. We’ve retrenched to a level where we’ve been fairly recently.
We are calling, as we have been since last year, for potentially heightened levels of volatility not seen since 2011 and 2012. The reasons for this are obvious: an election year where we know there will be a new president, continued geopolitical concerns on a global scale, possible tax increases and the US Federal Reserve raising interest rates. In fact, we believe the Federal Reserve will raise rates three more times in 2016, finishing the year at 1 percent. Here are some reasons to like the interest rate hike: 1) No more waiting for the hike. 2) The Federal Reserve is showing confidence in the US economy. 3) Some relief for savers. No more .1% on money markets. 4) A potential rise in mergers and acquisitions. This is typically good for small and mid-size company stocks. 5) Potentially stronger support for quality stocks, or stocks that have a strong history of paying and even increasing dividends on a quarter by quarter basis. Quality stocks have been somewhat overlooked the last 7 years of this bull market, taking a back seat to companies that manage their balance sheets more aggressively.
Fixed income (bonds) will likely experience some difficulties this year. There are a few areas within the bond market that stand out to us and where we see opportunities. Those areas are: 1. High yield municipal bonds (typically tax free). 2. High yield corporate bonds. 3. Global bonds where currency fluctuations have been “hedged” or minimized.
Our short-term economic outlook for 2016:
• Oil could start trending upward in price by May 2016 and might hit $48 bbl by year end.
• The US GDP (Gross Domestic Product) growth may be around 2.4%.
• The SP500 may close 2016 around 2125 (currently around 1946).
• China GDP growth of 6.1% (even after their rocky market start to 2016).
• Metals (gold, silver, copper, etc.) may start to move higher this year.
• The US dollar may start to flatten this year. The USD has been gaining value against other global
currencies. We expect those gains to slow and the currency values to steady in 2016.
Our long-term (3 to 5 years), broad-based outlook:
We favor international stocks and bonds over US stocks and bonds. Why? Many global economies are partaking in monetary easing policies (interest rate reductions) like we’ve experienced in the US over the last decade. These easing policies typically equate to a stimulus package for those foreign economies. We believe US stock returns will taper to mid-single digits for the next few years, and US aggregate bond returns to taper to the low single digits for the next 3 to 5 years.
We believe oil will likely to move to $70 bbl by 2018.
On a global level, natural gas may be more in demand than oil and the US may move deeper into being a major exporter because of this demand increase.
Our collective eyes are on emerging market economies and global small company stocks to potentially outperform over the next 5 years.
As always, if you are concerned or uncomfortable with the current status of the financial markets here and abroad, please contact us. We want to be proactive and address your issues right away. It may be necessary to customize a reallocation or rebalancing strategy based on a change in your risk tolerance or sensitivity to market volatility. Please don’t hesitate to call us so that we may answer your questions promptly. Our office number is 817-945-3335.
Kelly Montgomery, Client Services Director;
Jeremy Walker, CRPC, AWMA, Wealth Manager, President, Managing Partner;
Matt Hubbell, Wealth Manager, Managing Partner
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.
The economic forecasts set forth in the presentation may not develop as predicted and there can be no guarantee that strategies promoted will be successful.
The Dow Jones Industrial Average is comprised of 30 stocks that are major factors in their industries and widely held by individuals and institutional investors.
The payment of dividends is not guaranteed. Companies may reduce or eliminate the payment of dividends at any given time.
Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and bonds are subject to availability and change in price.
The market value of corporate bonds will fluctuate, and if the bond is sold prior to maturity, the investor’s yield may differ from the advertised yield.
Municipal bonds are subject to availability and change in price. They are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise. Interest income may be subject to the alternative minimum tax. Municipal bonds are federally tax-free but other state and local taxes may apply. If sold prior to maturity, capital gains tax could apply.
High yield/junk bonds (grade BB or below) are not investment grade securities, and are subject to higher interest rate, credit, and liquidity risks than those graded BBB and above. They generally should be part of a diversified portfolio for sophisticated investors.
International investing involves special risks such as currency fluctuation and political instability and may not be suitable for all investors. These risks are often heightened for investments in emerging markets.
The Standard & Poor’s 500 Index is a capitalization weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.
Precious metal investing involves greater fluctuation and potential for losses.
Securities offered through LPL Financial, Member FINRA/SIPC