Uncertainty, ambiguity, insecurity: oh my!

by John Hartley

Three weeks into the New Year and I’m sure you’ve encountered many reviews, recaps, evaluations, etc. of the economy and financial markets in 2015. (Though with an 8% drop in equities to start 2016, 2015 seems like ancient history.) Market-moving headlines in 2015 included the weather, Greece, China, oil and Fed rate policy. Add in geo-politics, terrorist acts and the beginning of the presidential primary races and the markets had a lot to absorb. Domestic equities were essentially flat, fixed income was marginally up (though high yield stumbled) and cash continued to disappoint. On the international side, emerging and frontier equity markets were crushed while bonds did even worse. Commodities tumbled along with oil and other diversifying strategies did not. I read somewhere that 2015 was “the year that nothing worked.” Sounds about right. But there was good news in 2015 -- the US economy continued to grow, modestly; unemployment fell; and consumers, banking and housing were strong.

What does this mean for 2016? More of the same? Yes, but, the US economy should continue to expand while developed international economies slowly strengthen. Corporate profits should also rise following the recent contraction. Though the Fed started to increase interest rates in December, monetary policy remains positive and inflation remains very low. Wage growth appears to be turning the corner. Greece looks contained, for the time being, and hopefully China and oil have reached their bottoms. (Personal thought here, the markets are over-reacting to both China and oil. Cheaper imports and $2.00 gas should be stimuli.) A return to double-digit equity returns? Probably not with the hole we’ve dug to start the year. Allowing time for the positives to encourage investor sentiment, I do think full-year 6% is reasonable for 2016. 2015 felt somewhat like 2011: a lot of good news but the markets just couldn’t get there. Now if we can just see 2016 bounce back like 2012.