We see 2016 as a year of positive but modest equity returns, with volatility continuing to play a visible role. There are 10 keys to success for this forecast:

  1. Slow and gradual tightening of interest rates by the Fed – Given modest growth in economic activity and a benign inflation outlook, we believe the Fed will raise interest rates judiciously. Investors who focus primarily on the negative aspects of higher interest expenses and headwinds to P/E multiples tend to overlook the benefits that higher interest income will have for the profitability of the financial services sector and for consumers and corporations with high levels of cash. Additionally, history has shown that rising interest rates are positively correlated with positive stock returns.
  2. Continued economic strength in the U.S., especially among consumers – The U.S. economy is expected to grow between 2.2% and 2.7% in 2016, which should produce solid job creation and further strengthen confidence among consumers and their ability to spend.
  3. Higher wage growth is likely around the corner – Due to solid job creation and the difficulty companies are having in attracting and retaining a high-quality labor force, wage growth is likely to increase from the current 2.3% level to approximately 3%. This increase, while lowering corporate profitability in the near term, is likely to bolster economic activity later in the year.
  4. Stabilization in China – While there has been increased concern due to volatility in the stock market and currency adjustments, we believe policymakers in Beijing are pursuing the right set of measures to shift economic growth from investment to consumption. While overall economic growth is likely to slow to around 6%, confidence in China is likely to stabilize, potentially eliminating an important source of risk for stocks.
  5. Improving global GDP growth – Overall growth in real economic activity around the world should increase from the low 3% range to the mid-3% range, providing opportunities for companies to increase revenues at a solid clip.
  6. Global earnings growth likely to improve – An expanding global economy and modest inflation should provide opportunities for companies to increase earnings. Cash flows should remain solid, fueling another year of stock buybacks. With interest rates rising, a stronger dollar is likely. This, combined with a modest decline in profit margins, is likely to keep EPS growth at approximately 6%.
  7. No major changes in an election year – U.S. voters are generally unhappy, but there is no consensus on what to do. Some think fewer taxes and less government is the correct path, while others favor more taxes and more government. Given this fact, we believe any sweeping mandates for change are unlikely, resulting in ongoing gridlock in Washington and a continuation of slow economic growth. This has historically been generally positive for financial markets.
  8. Reasonable valuations – Stocks are currently trading at 16x our forward multiple and could trade in the 16.5x to 17x range in 2016. Compared to bonds, stocks continue to be attractively valued. Our base case forecast is for stocks to reach 2063-2125 on the S&P 500.
  1. Recession unlikely – Our economic forecast calls for 2.2% to 2.7% real GDP growth with very little risk of recession,  due to solid job creation, growing wage gains, and a slow and gradual rise in interest rates.
  2. Secular bull market intact – If we are correct in our first nine keys to success, the secular bull market should remain on track.

In summary, while risks from geopolitical tensions have increased in recent weeks, we believe stocks can withstand higher interest rates in 2016, since economic activity is solid, inflation is low, and the pace of the Fed raising interest rates is likely to be slow and gradual.


Investment and Insurance Products: 
• Are Not insured by the FDIC or any other federal government agency 
• Are Not deposits of or guaranteed by a Bank or any Bank Affiliate 
• May Lose Value


Important Disclosures

The information presented does not involve the rendering of personalized investment, financial, legal, or tax advice. This presentation is not an offer to buy or sell, or a solicitation of any offer to buy or sell, any of the securities mentioned herein.

Certain statements contained herein may constitute projections, forecasts, and other forward-looking statements, which do not reflect actual results and are based primarily upon a hypothetical set of assumptions applied to certain historical financial information. Certain information has been provided by third-party sources and, although believed to be reliable, it has not been independently verified, and its accuracy or completeness cannot be guaranteed.

Any opinions, projections, forecasts, and forward-looking statements presented herein are valid as on the date of this document and are subject to change.

There are inherent risks with equity investing. These risks include, but are not limited to, stock market, manager, or investment style. Stock markets tend to move in cycles, with periods of rising prices and periods of falling prices. Investing in international markets carries risks such as currency fluctuation, regulatory risks, economic and political instability. Emerging markets involve heightened risks related to the same factors as well as increased volatility, lower trading volume, and less liquidity. Emerging markets can have greater custodial and operational risks, and less developed legal and accounting systems than developed markets.

There are inherent risks with fixed income investing. These risks may include interest rate, call, credit, market, inflation, government policy, liquidity, or junk bond. When interest rates rise, bond prices fall. The yields and market values of municipal securities may be more affected by changes in tax rates and policies than similar income-bearing taxable securities. Certain investors’ incomes may be subject to the Federal Alternative Minimum Tax (AMT) and taxable gains are also possible. Investments in below-investment-grade debt securities and unrated securities of similar credit quality, commonly known as “junk bonds” or “high-yield securities,” may be subject to increased interest, credit, and liquidity risks.

Investments in emerging markets bonds may be substantially more volatile, and substantially less liquid, than the bonds of governments, government agencies, and government-owned corporations located in more developed foreign markets. Emerging markets bonds can have greater custodial and operational risks, and less developed legal and accounting systems than developed markets.

Investments in Master Limited Partnerships (MLP) are susceptible to concentration risk, illiquidity, exposure to potential volatility, tax reporting complexity, fiscal policy and market risk. Investors of MLPs are subject to increased tax reporting requirements. MLP investors typically receive a complicated Schedule K-1 form rather than Form 1099. MLPs may not be appropriate investments for tax-advantaged accounts because of potential negative tax consequences (Unrelated Business Tax Income).

As with any investment strategy, there is no guarantee that investment objectives will be met, and investors may lose money.

Returns include the reinvestment of interest and dividends.

Investing involves risk, including the loss of principal. Diversification may not protect against market loss or risk.

Past performance is no guarantee of future performance.

Index Definitions

The Standard and Poor’s 500 Index (S&P 500) is a market capitalization-weighted index of 500 common stocks chosen for market size, liquidity, and industry group representation to represent U.S. equity performance.

The Dow Jones Industrial Average Index is a price-weighted average of 30 significant stocks traded on the New York Stock Exchange and the NASDAQ.

The MSCI Emerging Markets (EM) Latin America Index captures large and mid-cap representation across five Emerging Markets (EM) countries* in Latin America. With 119 constituents, the index covers approximately 85% of the free float-adjusted market capitalization in each country.

*EM Latin America countries include: Brazil, Chile, Colombia, Mexico, and Peru.

The Barclays U.S. Corporate High Yield Bond Index is a market value-weighted index which covers the U.S. non-investment grade fixed-rate debt market. The index is composed of U.S. dollar-denominated corporate debt in Industrial, Utility, and Finance sectors with a minimum $150 million par amount outstanding and a maturity greater than one year. The index includes reinvestment of income.

The NASDAQ is a global electronic marketplace for buying and selling securities, as well as the benchmark index for U.S. technology stocks. NASDAQ was created by the National Association of Securities Dealers (NASD) to enable investors to trade securities on a computerized, speedy, and transparent system. The term “NASDAQ” is also used to refer to the NASDAQ Composite, an index of more than 3,000 stocks listed on the NASDAQ exchange that includes the world’s foremost technology and biotech companies.

The STOXX Europe 600 Index is derived from the STOXX Europe Total Market Index (TMI) and is a subset of the STOXX Global 1800 Index. With a fixed number of 600 components, the STOXX Europe 600 Index represents large, mid and small capitalization companies across 18 countries of the European region: Austria, Belgium, Czech Republic, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, the Netherlands, Norway, Portugal, Spain, Sweden, Switzerland, and the United Kingdom.

The Bloomberg Commodity Index (BCOM) is calculated on an excess return basis and reflects commodity futures price movements. The index rebalances annually weighted 2/3 by trading volume and 1/3 by world production and weight-caps are applied at the commodity, sector and group level for diversification. Roll period typically occurs from 6th-10th business day based on the roll schedule.

Indices are unmanaged, and one cannot invest directly in an index. Index returns do not reflect a deduction for fees or expenses.