In Case You Missed Our Mid-Year Outlook
Thanks to all of those that attended our 2016 Mid-Year Outlook. We had over 80 clients in our two seminars recently in Greensboro and Winston-Salem. For those of you that weren’t able to attend, I wanted to write about some of the most salient points.
2016 has been one dominated by a slow growth economy keeping the Fed from increasing Fed Fund rates currently stuck at 0.25%. Political events like Brexit and a slowing Chinese economy seem to have changed what the normal Fed mandate of fighting domestic inflation. Interest rates will unlikely change until December as our dovish Fed is worried that interest rate changes will put the skids on paltry GDP expansion, create a stronger dollar and hurt the fledgling global recovery.
Oil and a strong dollar have led to equity markets working lock-step with the dropping price of oil especially early in 2016. As oil prices weakened so did markets. Overabundance of global oil and the fact that oil is denominated in dollars has created this high correlation that we haven’t seen before. This trend started in the first quarter of 2015 and thankfully is abating as oil prices push towards $50 for a barrel of WTI oil. (Price of oil is measured by West Texas Intermediate (WTI) crude oil.)
Because of this direct correlation, markets plummeted in January, 2016. HMC Partners made many portfolio changes during this timeframe focused on moving growth-oriented towards value, dividend-centric investments. As the coupling of oil and markets has recently changed direction, the types of assets now more in vogue are comprised of growth investments. Sectors like health, consumer discretionary, and technology have experienced nice runs over the last several months. Emerging markets are well-priced and could offer opportunities in 2017.
Corporate earnings have been slumping for four quarters. The strengthening dollar certainly was a contributor to market growth last year and earlier in 2015. Earnings are still negative, but they’re improving. This should help our domestic exporting companies if the dollar will continue to lose some of its strength.
Fixed investment assets have been led by high yield, investment grade corporate bonds, and some alternative investments with little correlation to either bond or equity markets. Treasuries and other interest-rate sensitive investments are likely to suffer the most if the Fed begins moving rates upward again in December.
Of course, there was much discussion about what impact a Clinton or a Trump victory might have on markets. Different scenarios dating back to the 1900’s regarding a Democrat (Dem) or Republican (GOP) President with a Dem Congress; a Dem/GOP President with a split Congress and a Dem/GOP President with a Republican Congress showed how well or poorly markets performed one-year after the elections. The worst scenario historically is a GOP President with a split Congress with an average one year loss after the election of 4.3% while best was a Dem President and split Congress when markets were up a year later by 10.4%. See below:
We believe that we are looking for a market downturn that normally happens in August or September. Dating back to 2008, August and September have been down eight times and up eight times. However, the four losses in August (2010, 2011, 2013, 2015) averaged <4.12>. The four losses in September (2008, 2011, 2014, 2015) averaged <5.22>%. (1).
If we’re right and a market downturn does occur in August and/or September, we plan on a rotation away from some of our value oriented assets into growth. We certainly will not be excluding value assets, but a time for reallocation is close at hand.
If you have any questions regarding our seminar or other questions, please don’t hesitate to call or email us with them.