2016 IS EXPECTED TO BE ANOTHER YEAR OF LOWER RETURNS
The U.S. stock market benefitted tremendously in 2013-14 from an improving economy and the Federal Reserve's reluctance to increase interest rates and its policy of stimulating the economy by quantitative easing through purchases of debt securities. Quantitative easing has ended in the U.S. and the Fed is now increasing interest rates. On the other hand, central banks in Europe and Japan have adopted quantitative easing policies and are reducing interest rates which has produced negative interest rates in some cases, an inexplicable and unsustainable situation posing real risks to the global economy. These develpments justified a generally risk averse posture toward stocks which is further amplified as follows:
The Federal Reserve looms large, and any additional increases in interest rates can be a headwind to increasing stock prices. Moreover, global market forces further pressure U.S. markets as global economic growth, changes in currency exchange rates, liquidation of sovereign wealth funds and escalating conflicts and wars take their toll. Also, the election cycle in the U.S. this year has been particularly divisive and erratic, causing unprecedented concerns about increasing political dysfunction.
Before making overly aggressive commitments to equities be prepared to wait for some stabilization of oil prices, interest rate policy, and a more positive outlook on the U.S. electoral and political situation. A final risk that requires monitorig are signs that the U.S. economy may be entering a period of contraction.
As these risk factors abate, individual stock selection rather than exposure to broad market ETFs may be more rewarding as market valuations are near record highs and some industry sectors such as financials, materials, and energy are facing clear headwinds.
We favor attractively valued stocks in the consumer discretionary, technology, health care and biotechnology industry sectors where we are increasing our equity exposure. We are also looking to invest in special situations in other industry sectors resulting from overdone stock price declines due to short term disappointments rather than long term fundamental prospects.
We would continue to avoid excessive exposure to stocks in the financial, materials, and energy industry sectors, though some special situations may warrant attention.