Providing some answers to the questions on the media’s minds (and maybe the investors’).
This is the time of year when we get a lot of questions regarding our outlook for next year including a call for point estimates on the usual indices and other variables. It is somewhat pointless to provide point estimates, but we did some of that below. We are in an unusual environment, with many variables that can certainly see some volatility throughout the year with, in my view, greater dispersion in results, similar to this past year. We are working on our annual Altegris Perpectives piece, “What to Expect in 2016 (and Beyond).” I must say, it is a harder year for developing definitive expectations than I have seen in a long time. That says something about the markets and increases the desire to spend time with the micro folks as opposed to the macro types. Historically, when this has been the case, that has paid off. Paying Attention is still the advice, but I would add the words of my friend and former co-worker many years back, Art Cashin, “…Stay Nimble.” As many of you who on occasion read the Altegris Blogs, you have seen me write that Past Performance is Not Indicative of Future Results. Given some of the dispersion we did see in 2015, this may be a time when last year’s performance may be more indicative of this coming year’s results.
Below are some of the consistent questions that have come up from those looking for answers.
Taking into consideration the rollercoaster some equity investors found themselves on this past year, particularly in August, what are the biggest risks facing investors in the stock market in 2016?
There’s a long list of factors impacting the stock market as we begin the New Year. The global slowdown, a strong dollar and the Federal Reserve’s late-in-the-game rate change, to name a few, all add a degree of uncertainty for investors. I would also stress two other factors that will play into investor returns: another year of profit disappointment driven by wage increases and the end of the oil dividend for many corporations.
What will be the biggest surprise for investors over the next 12 to 18 months?
Inflation could pick up a lot faster than widely anticipated. I would encourage investors to keep an eye on wage growth.
How are you advising clients looking to allocate assets and potentially reinvigorate their returns entering into the New Year?
We’ll be publishing an in-depth outlook with a few wild cards shortly, but I can provide a quick preview of what we’re seeing in the markets.
To the extent an investor doesn’t need liquidity, the opportunities in the less liquid parts of the markets will likely benefit from a growing illiquidity premium. Just don’t buy a daily liquidity fund that has been buying illiquid securities to juice returns.
Investors experienced no to low equity returns in 2015. We’re predicting more of the same for equities next year. It may prove to be a good year for true equity hedge fund managers. In terms of fixed income, we’re anticipating some credit accidents, but on balance, no major credit meltdowns. The recent moves in the high yield markets may have provided some opportunities if one does very specific credit analysis security by security. Activist and event-driven managers are likely to experience favorable returns as M&A activity continues to be strong going into 2016. As we have seen this past year, sometimes an activist approach doesn’t work, but I think over time it does. This recent action does open up opportunities for those who have a longer time horizon and are dealing in the less liquid parts of the markets. I recently made a point (which I stole from one of our own, Greg Brucher) “…investors buy and hope, activists buy and influence, and private equity firms buy and fix.” There will be a lot of situations open for fixing over the next few years.
Given Donald Trump’s campaign has been getting a lot of media attention, with speculation that he could actually have a shot at the Republican nomination, what would the election of Donald Trump mean for equities?
Trump’s nomination would most likely be a negative for equities since it would represent some element of disarray in the Republican Party. If he is elected, however, we think it could potentially be positive for the markets. Most of the programs he is calling for would raise debt levels more than any previous administration’s policies. The upside for the economy would be a lot of fiscal stimulus. The downside is that it would inevitably increase rates. This would also bode well for defense stocks. Whoever is elected, I think the odds of more fiscal action is higher than it has been over the last 8 years, even amidst ongoing dysfunction at the Congressional level.
Historically, the President only affects stocks on the margin. But as we’ve seen with Trump’s campaign for the nomination, a Trump presidency would no doubt be a different animal.
Who would be the best presidential candidate for the stock market?
I’m more interested in picking the best candidate for the country. While one could say what’s good for the stock market is good for the country, I tend to think it’s the other way around. Historically, markets have done better under Democratic presidents, but it’s a close call.
Looking forward to the next 12 months, on which sectors are you taking a bullish or bearish stance?
We’re bullish on defense stocks, technology and healthcare. In terms of technology, we’re actually favoring old tech over new tech, particularly companies involved with the cloud, cybersecurity and have been spending on R&D. Moore’s Law continues to be operative.
Consumer staples and most fast food companies are where we’re currently bearish. While staples tend to be a more defensive sector that does relatively well in slow growth environments, changing eating and drinking habits among Americans are going to make it tough for these companies to keep up and generate meaningful returns. Once again, it is company by company, but they won’t all be making the adjustments to new habits in a timely fashion.
If you had to give 2016 year-end targets for a handful of major market indicators and indices, what would they be?
Take the point estimates with a grain of salt because on any given day those numbers can and will change. But overall the market may keep pace with nominal GDP results next year in spite of the profit picture looking quite weak.
S&P 500: 2,120 (but with big dispersion)
10-year Treasury yield: 2.65%
Crude oil (WTI): $52 (this was my target before this latest downdraft and I’m sticking with it—at the moment)
Fed Funds Rate: 0.75%