2015: A Fair Amount of Pain, with Little Gain
Commodity Prices, the Fed, and China Drive 2016’s Economic Outlook
2016 Equity Outlook: Can Stocks Withstand Higher Interest Rates?
High Yield Bond Market Stronger Than It May Appear
Outlook for Oil: Ready for a Rebound?
From the Desk of
GARRETT D’ALESSANDRO, CFA, CAIA, AIF®
Many asset classes experienced meaningful volatility in 2015 without garnering much return for investors. Economic uncertainty, slowing corporate earnings, sensitivity to interest rate increases, declines in energy markets, and the increased risks in the high yield debt markets all converged to dampen U.S. equities and fixed income returns. The market began to experience downward volatility in August, abated for a few months, then rose again in December. This resulted in U.S. equities and core fixed income both finishing up around 1%, although high yield bonds were down about 5%. For the year, U.S. equites generated modest positive returns, while investment grade bonds were largely flat and high yield markets declined.
The disappointment in U.S. earnings, largely attributed to the declines in the energy and manufacturing sectors, accounts for the muted equity returns. Currently, we believe that the U.S. economy is in a stable, moderate growth phase with a low risk of recession. At this time, we do not believe issues in China and Europe will lead to a U.S. economic downturn. China is largely misunderstood with respect to its impact on U.S. economic activity, and oil price declines are favorable for many major economies globally. Our belief is that domestic levels of employment, combined with the strong performance of several economic sectors, will give the U.S. economy the necessary spark to generate modest growth.
The Federal Reserve raised interest rates and appears willing to implement more increases. For equity investors to experience a favorable return in 2016, corporate profits need to meet our expected 6% growth rate. We do see profits growing in many segments of the U.S. economy, but they will likely be offset by significant weakness in energy and industrials.
After three years of double-digit gains in the S&P 500, 2015 was undoubtedly disappointing for investors. However, as is often the case, the total picture is more encouraging than the headlines suggest. Wages are growing, which is a critical factor in a domestic economy dominated by consumption. The housing market continues to recover. Car sales are at record levels. Inflation is subdued. Energy prices remain low—a net positive for consumers and the overall economy. The Fed is raising rates because it believes the economy is strengthening and can withstand modest increases. These are not signs of an imminent recession or bear market.
Things look less promising overseas, however, our view there is more nuanced. Europe continues to grapple with slow economic growth, but is slowly working through its issues. As such, the risk of danger is perhaps in the past. While the headlines concerning China’s economic growth are—in our view—nothing new, the Chinese economy is experiencing unprecedented changes all at once. Changes such as currency management, debt management, corporate privatization, and political dynamics will take decades to complete. Despite the headlines and our expectation of future volatility and uncertainty, longer term growth in corporate profits is attractive.
We have confidence in our agile and competitive economy and remain committed investors in U.S. companies. Many sectors like services, technology, and healthcare are continuing to expand and innovate, shaping the economic future and potential to provide shareholders with appropriate long term rewards. America’s private sector continues to move forward and we are setting realistic expectations for returns in 2016.
On behalf of City National Rochdale, I wish everyone a very happy new year. We value your relationship and welcome hearing from you. If there is something you would like to discuss, please contact your advisor or portfolio manager. If I can be of assistance to you, please contact me directly at email@example.com.
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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.
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