January 7, 2016
"We've long felt that the only value of stock forecasters is to make fortune tellers look good."
- Warren Buffet
It's safe to say that a majority of investors were not celebrating their portfolios this past holiday season. With the Dow Jones Industrial Average down 2.23%, the S&P 500 down 0.7%, and bonds broadly down too, nothing worked. But as far as tough years go, I much prefer 2015 to 2008. Although the economy did well last year, the markets suffered primarily due to the difficulties in the energy sector. Energy companies, both directly and indirectly, have a large influence on corporate earnings; many industrial companies make products sold into the energy industry. Without the drag of energy, earnings would have been up ~10%, and the stock markets could have approximated that return too. Alas, it was not meant to be. Will 2016 offer more of the same?
Investing over any short period of time is a game of chance. Thus, market prognosticators have a notoriously poor track record; it's the only serious profession I can think of where if you're actually right, everyone is surprised. So you'll forgive me if I refrain from making a guess as to 2016's performance. However, there are compelling reasons to be optimistic. They are:
- Since the Great Depression, every single recession has been linked to high-interest rates and/or high energy prices. That doesn't mean one is impossible. It just means that, because interest rates and energy prices remain historically low, one is unlikely. As one of my favorite economists, David Rosenberg, likes to point out, "there is no such thing as a bear market that is not connected to a recession." The reason is that low energy prices and interest rates strengthen consumers, on whom ~70% of our economy depends.
- The severity of the earnings decline caused by the energy sector in 2015 has likely run its course. In other words, the worse seems behind us. Without that headwind, earnings have good potential to compare positively with 2015. Better still, if oil prices begin to turn around, as I believe they will, what was once a headwind will become a tailwind.
- The long-term potential for stocks remains appealing especially when compared to the major alternatives: bonds and cash. The low yield on bonds will offer little protection if the Federal Reserve makes good on their word to raise interest rates several more times in 2016. And you need a microscope to find the returns on cash.
- After a year like 2015 investor sentiment inevitably takes a hit, and expectations are lowered. According to research firm Birinyi Associates, two-thirds of investment banks interviewed suggested potential returns for the S&P 500 in the single digits. Investor sentiment is a notoriously fickle thing, vacillating like a moody child. I point this out to illustrate that we are nowhere near the "euphoria" that the famed investor Sir John Templeton called the death knell of bull markets. That is an encouraging thought.
- Even in a tough year like 2015, S&P 500 companies increased their dividends 10%.
The myriad of reasons to be cautious are well-rehearsed on the financial press. From disappointing growth to interest rate fears, etc., very little of it all seems like news to me. With the markets, the things that hit hard are the ones you don't see coming. What strikes me as having the potential to be different and dangerous in 2016 is international conflict. An adventurous and antagonistic Russia meddling in the Middle East cauldron during the last year of a presidential administration represents an unknown that is at best benign; North Korea is currently raising its ugly head, etc.
The timing of risks and rewards in the capital markets is never certain. So if you're disappointed in your returns in 2015 it doesn't mean you've done anything wrong. Tough years will inevitably happen from time to time. In 2016 we will have good days and bad days, good months and bad ones. Where it ends on December 31st is impossible to predict. What is certain is that the more patient you are with your investments, the more likely your experience will ultimately be rewarding.
Brennan R. Redmond, CFA - Senior Vice President
(This article contains the current opinions of the author but not necessarily those of Brighton Securities Corp. The author's opinions are subject to change without notice. This blog post is for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. References to specific securities and their issuers are for illustrative purposes only and are not intended and should not be interpreted as recommendations to purchase or sell such securities.)