Monitoring the Market in 2016Submitted by Butera Wealth Management, LLC on July 6th, 2016
We constantly receive mixed signals about monitoring the market – whether or not we should, how often, and how closely. Considering its large impact, particularly on investors but even on consumers, it is imperative that we keep up with its trends. That is not to say investment decisions should be based on minute-by-minute or even day-to-day market data, but rather on a larger scale, in context with global historical data. Instead of panicking when particular events shake up the market, it is ideal to monitor the market from a distance and anticipate future trends, so you can carefully consider any market moves.
The Cycle Clock
A great reference point is the cycle clock, which assumes progress through current expansion from data based on historical averages for prior expansions. As of June 2016, it suggests we are in the mid-to-late stages of the current expansion, but we are still seeing some early cycle and late cycle behavior. Specifically, extended loose monetary policy, inflation, and employment growth are still showing early cycle behavior, while some items relating to corporate profits are showing late cycle behavior, although they may be reset if profits improve.
Equity Asset Classes
With that in mind, as well as possible economic and market dynamics that will dictate durability, we can expect mid-single-digit stock market returns in 2016, though with a likely volatile path. Equity asset classes are likely to be led by large caps, as the age of the business cycle leaves us cautious on small cap stocks. While growth and value could clash near term, growth is better positioned in the intermediate term. Although allocations would be best focused in the U.S., emerging markets (EM), where valuations are attractive, are becoming more approachable. For instance, China’s growth outlook has improved, and further stimulus efforts may boost performance.
As the economic expansion continues, cyclical growth sectors, including technology, continue to be preferred equity sectors. However, below-average valuations make healthcare increasingly attractive despite election-related drug price scrutiny. With oil likely near fair value, crude prices may already reflect progress toward balancing supply and demand. Not to mention, positive earnings revisions, technicals, and improvement in China drove the May materials upgrade. Our global growth outlook also suggests industrials may provide a buy-the-dip opportunity.
Despite supply increase, strong investor demand leads continued municipal strength. Yields at or near historic lows reflect the historic seasonal weakness of municipal performance in the month of June. July and August offer more positive seasonals, and over the longer term, a favorable supply-demand balance and prospects for higher (local) taxes may provide support in 2016. Municipal bonds’ credit quality remains generally good, but problem issuers remain isolated and have not impacted the broader market.
High-yield bond strength continued into June, pushing the average yield spread below 6%, a level slightly lower than estimated, given low but increasing defaults. Some may take a more cautious approach, but a “coupon-clipping” environment may still aid suitable investors. For example, a suitable investor may use a blend of high-quality intermediate bonds coupled with less interest rate-sensitive sectors, such as high-yield bonds for fixed income allocations.
Commodities and Alternative Asset Classes
The rise in commodity prices has stalled somewhat, with the movement of the dollar a major driver. Domestic energy production has declined sharply in response to declining prices, boosting oil prices. With those higher energy prices, credit-based strategies have continued to recover. Though always volatile, managed futures strategies have generally benefitted from the decline in interest rates.
While there is no guarantee of future results, referencing historical performance alongside current data can be an effective way to monitor the market and anticipate its trends. No matter your investment strategy, there are always risks involved. Knowing what to expect makes for informed, confident decision making. For professional investment advice and wealth planning, contact the financial experts at Butera Wealth Management
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.
The economic forecasts set forth in the presentation may not develop as predicted and there can be no guarantee that strategies promoted will be successful.