30
Jan

Outlook 2016 – Embrace The Routine

Outlook 2016

 

LPL Financial has released their Outlook 2016.  As they look forward to 2016, the LPL Research team expects a return to routine for some key areas of the economy and market, but by a path that may catch some investors unprepared. Investors will need a solid plan to navigate the changing landscape as they adjust to changes like the start of Federal Reserve (Fed) rate hikes, a maturing economic cycle, and the 2016 elections.  Some of their expectations for 2016 include:

  • U.S. economic growth of 2.5–3%.[1] The mix of that growth may look different than in 2015, with manufacturing, business capital spending, and net exports taking larger roles. Labor markets are almost back to long-term expectations, and inflation may be poised to accelerate. An extraordinary extended period of loose monetary policy in the United States should start to normalize.
  • Mid-single-digit returns for the S&P 500.[2] Stocks, we believe, will not collapse, as many think, or soar, as many hope, but may offer near historical routine returns. Earnings may start to normalize, and oil markets should find their equilibrium. International markets may re-emerge as a more viable investing opportunity. But we are still in the second half of the economic cycle, and investors need to be vigilant about monitoring pockets of volatility and potential signs of an economic downturn.
  • Limited returns for bonds. The year as a whole may look similar to 2015, with bond prices facing the challenges of high valuations, steady economic growth, and the prospect of interest rate hikes. Still, bonds play a vital role in investors’ portfolios to help with risk mitigation and diversification.

 

 

[1] Our forecast for GDP growth of between 2.5–3% is based on the historical mid-cycle growth rate of the last 50 years. Economic growth is affected by changes to inputs such as: business and consumer spending, housing, net exports, capital investments, and government spending.

 

[2] Historically since WWII, the average annual gain on stocks has been 7–9%. Thus, our forecast is in-line with average stock market growth. We forecast a mid-single-digit gain, including dividends, for U.S. stocks in 2016 as measured by the S&P 500. This gain is derived from earnings per share (EPS) for S&P 500 companies assuming mid- to high-single-digit earnings gains, and a largely stable price-to-earnings ratio (PE). Earnings gains are supported by our expectation of improved global economic growth and stable profit margins in 2016.

 

6
Aug

2015 Midyear Outlook – Some Assembly Required

2015

LPL Financial recently released their midyear economic and market outlook.  Their theme is that investors should pay close attention to portfolio construction going forward.  The economy has delivered six consecutive calendar years of positive returns for stocks since the end of the Great Recession.  However, constructing a strategy for the remainder of the economic expansion will require a tricky assembly.  Divergent monetary policies reveal an uneven global recovery that has triggered an uptick in stock market volatility.  A few important pieces requiring assembly for the remainder of 2015 include:

  • How the US economy pieces together the components needed to bounce back from its lackluster start of the year?
  • After successfully delivering the US economy out of the recessionary “warehouse,” how does the Federal reserve assemble an exit strategy from its six-year policy of zero interest rates?
  • Corporate earnings growth continues to search for that spark to ignite equity advances.

A key point made by the LPL Financial report is the importance of diversification.  Diversification detracted from market returns in 2014, but the beginning of 2015 witnessed the return of diversification benefits.  With volatility poised to rise in the second half of 2015, the potential benefits of diversification should hopefully continue to materialize.

The last point I want to highlight is LPL Research predicting another positive year in the US stock market as measured by the S&P 500 Index.  Their forecast range is 5-9%.

To read the entire report click here:  http://lpl-research.com/outlook/Midyear-Outlook-2015_Spread.pdf

 

 

22
Jun

Grexit – Do We Have A Deal?

by Riaan Nel in Global Economy

Greek Prime Minister

Sky News from Britain provides a nice overview of the potential deal between Greece and her creditors here (http://news.sky.com/story/1506133/hopes-raised-of-eu-deal-over-greek-bailout.)  However, most of the pension cuts will be funded by increased employer contributions, i.e. tax cuts.  I think Greece are being pushed too hard to institute austerity measures.  Austerity should be phased in over a longer period of time.  This, notwithstanding, the Greek government will have to cut pensions.

Midway through the article there is a nice little video on the Grexit.

 

18
Feb

China Expands Island Construction

by admin in News

China construction

http://www.wsj.com/articles/china-expands-island-construction-in-disputed-south-china-sea-1424290852?mod=e2fb

 

18
Feb

The Fed’s Rate Debate

by Riaan Nel in Global Economy

Janet Yellen Chair of the Federal Reserve Board of Governors

Janet Yellen Chair of the Federal Reserve Board of Governors

 

According to minutes released today by the Federal Open Market Committee for their January 27-28 meeting it appears Fed staff economists were mostly upbeat.  They estimated the economy grew faster in the second half of 2014 than they had anticipated.  Also, the anticipated boost to consumer spending from declining energy prices allowed Fed economists to revise upward their outlook for the first half of 2015.  “Overall, the risks to the outlook for US economic activity and the labor market were seen as nearly balanced,” the minutes said.

What stands out to me in the minutes is the detailed discussion and debate about when to raise rates and by how much?  Essentially the debate revolves around the issues of inflation and stability risks on the one hand, and impeding the economic recovery on the other hand.  If the Fed waits too long it could lead to a build up of inflation and financial-stability risks.  Conversely, if the Fed moves too quickly the economic recovery could be impeded or choked off.

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