2016: China, The Markets and More

Jan 8, 2016 | Investment Updates

SageVest Wealth Management Q4 Investment Commentary graphic

Last year started fairly steady and strong, but lingering risks from the summer caused 2015 to fall flat, with broad-based negative stock market returns. Most economists predicted a healthy 2015, and it should have been by a number of historical standards. Unfortunately, not even the beloved Santa Claus Rally came to fruition. On the heels of such a year, and a rocky start to 2016, investors are left questioning the outlook for the markets. Last year proved that forecasts can easily go awry. That said, SageVest Wealth Management offers our insights for the year ahead.

 

Major Indices  2015 % Change
Dow Jones Industrial Average – 2.2%
S&P 500 Index – 0.7%
S&P 400 Mid Cap Index – 2.2%
S&P 600 Small Cap Index – 2.0%
MSCI All Country World Index, ex-US – 5.7%
Barclays Aggregate Bond Index + 0.6%

 

As we look forward, SageVest Wealth Management sees many of the key themes of 2015 carrying into the New Year; namely, strength in our US economy, central bank interventions, the impact of low oil prices and China’s slowing economy. We will discuss each of these themes in greater detail. Furthermore, we expect a continuation in increased volatility, bringing both ups and downs. This requires investors to remain focused on the future, with the fortitude to buy on the lows, and the positioning to weather a storm if one comes along. As we discussed in June, this is an important time in the markets to evaluate your investment positioning.

US Strength

The US economy maintained fairly strong momentum in 2015, despite lackluster stock market performance. Many key indicators remain positive, from auto sales to the housing sector, and a low unemployment rate is certainly good news.  erger and acquisition activity reached record levels, exceeding the hay days of 2007 as companies joined hands in deal after deal.  We also saw mega initial public offerings, and a swath of company stock buy-backs.  All of these were positive factors for the markets.

Strength in our US economy prompted the Federal Reserve Board (Fed) to raise rates for the first time in almost a decade. An uptick in rates could prove to be a boost for US stocks. It could also fuel more borrowing consumption with a mindset of locking in low rates while they last. There are a few factors of watchful note, including sluggish manufacturing activity, an ailing energy sector, and recent weakness in corporate earnings. We are monitoring these indicators, but remain generally optimistic about the US economy as we look forward, particularly as strength in the US dollar seems to have stabilized, alleviating pricing pressures among our larger multinational companies. Our portfolios continue to overweight US equities.

China:  The Wild, Wild East

If we have to put our finger on one wild card for 2016, it’s China. Fissures in the world’s second largest economy have become pronounced, while its stock market has ebbed and flowed from bouts of chaos. Indicators certainly point to continued weakness as manufacturing is stalling, much needed consumer spending is tepid, and global companies and investors increasingly question their appetite for involvement.

We are in the era of the Wild, Wild East, where anything, and just about everything, should be expected. China’s government officials were swift to unleash a long list of interventions in 2015, ranging from expected actions such as lowering interest rates, to jaw-dropping events such as mandating stock trading among large companies and mysterious sequestrations of corporate executives.The first week of 2016 alone has already included a whirlwind of interventions and knee-jerk reactions after the Shanghai index halted trading twice in just four days, each time falling by 7%.

Given the size of its economy and the wield of its government power, China has the ability to make 2016 go bang or bust. This likely spells increased volatility in stocks, oil prices and currencies alike, particularly as the country’s erratic actions are elevating uncertainty.  Everyone is watching as a less than free-market China tries to dictate the future while interplaying with the balance of the free-market world.

Oil Prices

A precipitous fall in oil and other commodity prices has also cast wide ripple effects. We have an uncommon event of more countries producing oil (namely the US and Canada), coupled with declining world demand, particularly as China’s growth contracts. Low oil prices are great for consumers, giving many people an effective pay raise by paying less at the pump. However, low oil prices also bring hard times to the energy sector and commodity-dependent countries.

We believe that oil prices will eventually break higher to the upside, but also warn that instability could persist in the short-term, given the depths that prices have reached and global tensions among oil-rich countries. We expect oil to be a continued driving force in 2016, and are holding lighter than average exposure to more energy-dependent emerging markets based upon this outlook.

Central Bank Actions

Central banks around the world jockeyed to stimulate growth in 2015, with one notable exception: the US.  Our central bank nudged rates higher to moderate growth and thwart inflation. We’re now at an interesting juncture where some of the largest central banks are moving in opposite directions. This begs the question of whether those trying to promote growth will succeed as the US tries to temper growth.  This is every country’s wish, but it’s a delicate and difficult balancing act to perform.

We’re also in a period where surprise central bank moves are becoming more common, and where the stage for a global currency war has been set.  To this end, we warn against continued volatility as currency price wars can be dicey and dangerous, and virtually impossible to predict.

US Interest Rates & Bonds

After two years of speculation, the Fed finally increased rates in December. Thus far, the impacts have been rather uneventful, as we largely anticipated. That’s not to say that further rate increases won’t occur or have an effect.  However, we don’t see significant sequential increases for two distinct reasons. First, the balance of the world is struggling to reinvigorate growth.  Second, not every aspect of the US economy is doing well, including a large segment of the population that is underemployed. Our viewpoint is that the Fed is acutely aware of these concerns and that they don’t want to upset the apple cart for growth, either here or abroad.

We encourage investors to consider the potential of a large rate increase (which we see as unlikely), and the importance of holding capital preservation assets (bonds) to protect against market downturns. This is particularly important for those who are about to, or who already depend upon their investments for supplemental income.

In Summary

A number of important, and perhaps fast moving, investment considerations are anticipated in 2016. Growth remains strong in the US and stimulus efforts are abundant around the world.  So too are the risks. This is a critical time to ensure that you have the proper positioning to either prosper or protect, as the markets could offer the potential for either outcome.

As always, we encourage you to contact SageVest Wealth Management with any questions about your investments or other financial considerations.

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Prepared by SageVest Wealth Management. Copyright .
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