Certainly, it’s been a tough week for the markets. Still, we can’t stress enough how important it is to stay steady, know your risk profile, ensure you’re investment allocations match that profile and think longer-term. Historically, this approach has proven itself out time and time again.
Looking forward, here are 4 indicators to watch this year…
Due for an Earnings Rebound? – Component stocks of the S&P 500, when aggregated, produced disappointing earnings in 2015. Our early read is that earnings actually contracted slightly on the year, by -0.3%. As we’ve said many times, a closer look at the earnings numbers reveals that ‘Corporate America’ is actually doing well. It’s not an earnings recession – it’s an Energy sector recession. The steep declines due to caving crude oil prices have crushed many resource-intensive companies and the impact has been notable enough that it’s weighing down aggregate S&P 500 earnings. Strip away the Energy sector, and earnings growth would have been reasonably positive on the year – a fact that is underappreciated in the market. Nevertheless, for 2016 we see an earnings rebound with the potential for positive year-over-year growth. Consensus sees +7.8% earnings growth with 4.5% revenue growth, though we actually expect numbers to come in slightly lower than that. Stocks should follow.
Europe’s Economic Expansion – 2015 was a positive year for Europe, something that’s been evading them for quite awhile now. But growth was slow and inflation is still stubbornly hovering close to zero with double-digit unemployment in most countries. There’s still a ways to go. But, I think 2016 could be a year where Europe starts to break through some of their economic headwinds shedding away issues like the Greece sovereign debt crisis, shaky euro memberships and the Syrian refugee crisis. These factors, coupled with a devastating terrorist attack in Paris, made the road tough for Europe in 2015 even as the European Central Bank stepped up stimulus measures. Signs of improvement are already starting to show, however: manufacturing numbers late in 2015 and new orders saw the highest monthly gains in over a year and a half, and most of the developed leaders posted growth. I expect it to get incrementally better next year – Europe is moving forward, not backwards.
China’s Growth Plateau – let me first say this: I think a day of reckoning is coming for China with the eventual dismantling of the state’s grip on big industry and an eventual collapse of their relentless capital controls and restrictions on foreign investment and free speech. At the end of the day, China’s economy has essentially doubled in size over the last ten years and simple economies of scale tells us that super high growth rates simply aren’t sustainable. Additionally, we actually see China’s slowdown as a good thing – China is deliberately taking steps to restructure their economy – to rely more on consumer spending and services versus investment and infrastructure spending. This is a wise move longer-term, but in the near term some of the once-darling industries suffer: the manufacturing sector has experienced falling profits and over 40 months of deflation, while industrial production grew at a slower pace than expected.
The Wall of Worry! – the most recent high yield selloff (which we believe is overblown) added some fuel to the negative sentiment trend that’s been building of late. With weak returns in 2015, the Fed raising interest rates, a junk bond selloff and China worries in the front of many investor’s minds, there is a healthy dose of pessimism building about future equity returns. Which makes us more bullish. In our view, the U.S. should grow on par with the growth we saw in 2015, Europe should recover at a better pace, and earnings should experience a rebound. If those positive forces go mostly unnoticed because investor pessimism sufficiently clouds them, that should bode well for stocks.
Disclosure