Closing Out the Old Year; Looking Ahead to 2016
As anticipated, the U.S. Federal Reserve (Fed) raised interest rates on December 16th and sparked a 3-day stock market rally of 3.0%. We predicted this move would be seen as a vote of confidence in the slow but steady improvement of the U.S. economy. However, the rally was halted by the market’s year-long nemesis – oil prices – which fell below $35.00/barrel. Although lower oil prices is a positive development and more due to over-supply than lower demand, the stock market is currently treating lower oil prices as an indicator of a slowing global economy. Unfortunately, this back-and-forth battle will likely continue for the rest of 2016. In fact, the negative impact of dropping oil prices (to an 11-year low) on U.S. markets continues into early 2016 as the S&P 500 has sunk 4.0% (based on the January 5, 2016 close) since the Fed’s announcement of its first interest rate hike. With concerns over China’s economy and Middle East tensions, the U.S. market may be headed to a 10% correction soon.
While the 6-year bull market which began in 2009 technically ended in 2015 with the S&P 500’s negative annual return (-0.7%), and the Dow Jones 30’s negative returns (-2.2%), the NASDAQ did manage to squeak out a positive performance (+5.7%). Our “All-ETF Model Growth Portfolios” with their focused strategies (which we created in January 2015 to test) were able to beat the S&P 500 with positive returns for 2015. This goes to show that while investing in general low-cost indexes is smart, investing also in low-cost focused sector indexes may be better. We will present and discuss these model growth portfolios in the months to come, so register here to receive our future blogs.
While we anticipate that the U.S. stock market will be more volatile in 2016 than in 2015, we do not see any need to change our TSOA Retirement Accounts Asset Allocation at this time. Investors should continue to add to their 401k holdings using Dollar-Cost Averaging technique, and they should look to add significantly to other existing positions and accounts when the markets are lower.
Our Outlook for 2016
We believe that 2016 results for the U.S. stock market will be impacted by answers to these 5 critical questions:
- How will projected rate hikes (2 to 4 times in 2016) by the U.S. Federal Reserve affect the U.S. and global economies?
- Will China continue its slowdown, and how will its growing labor unrest/conflicts impact China’s economy?
- Will the strong U.S. dollar adversely impact the ability of European economies to continue their rebounds after a long recession?
- Can oil prices rebound to the $60/$70 level (required to produce profits for U.S. oil companies) in 2016, or will they linger below $40 for a long time?
- Will corporate earnings be enough to support a current S&P 500 price/earnings (P/E) ratio of 16 or better, or will earnings decline and cause the markets to make a corresponding correction?
All of the above bears careful monitoring as each can trigger a significant U.S. stock market correction of 10% or more in 2016. As such, managing risk will be even more important as the U.S. stock market looks to possibly begin a new bull run. For additional comments in future blogs register for a free subscription here.
PLEASE NOTE: Beginning in 2016, Jim Tso will publish his Stock Market Reports on an “as needed” basis that address significant changes and/or developments that impact U.S. markets. As such, this blog site will publish periodic Stock Market Reports instead of monthly Stock Market Reports. This change is designed to provide more timely and thus, more helpful information to you.