Multi-Unit Franchisee Magazine Issue II, 2016 | Page 102
InvestmentInsights BY CAROL M. SCHLEIF
Managing Uncertainty
Trends to watch in 2016
A
fter an extended period of
complacency, markets have
whipsawed in 2016. Will this
level of heightened volatility
continue? Does it signal an impending recession? We think the answers may well be
“probably” and “we think not.” Let’s look
at what could go right, what to watch, and
what might be different in 2016.
What could go right?
• Many macro components underpinning the solid nature of the U.S. and
global markets remain in place, including
reasonable retail sales, solid consumer
sentiment, strong housing activity, high
employment percentages, and improved
corporate and consumer balance sheets.
• Central banks outside the U.S. remain accommodative, encouraging exports
and supporting business trends in the EU
and elsewhere.
• China’s progression toward a consumption-based society is proceeding rapidly.
Recent reports show consumer spending
now makes up 65 percent of China’s GDP
(vs. 50 percent in 2014)—an amazingly
fast shift for such a massive economy. A
better balance between consumption and
production is a more stable platform for
continued long-term growth.
• U.S. demographics, with Millennials now the largest contingent of both the
general and the working-age population,
have positive implications for a wide range
of industries.
• The majority of the negative impact
to corporate earnings and capital expenditures from the steep decline in oil prices
has already been seen. (Energy company
earnings within the S&P 500 were down
to $17.40 in 2015 for example vs. $41.40
in 2014.) Even if energy prices fall further,
their impact on S&P 500 earnings will be
muted by their relatively small representation. The bulk of the economy benefits
from lower oil prices, though much of that
benefit comes with a lag.
• The sharp downtick in equity prices
globally, even as earnings have come in
largely as expected, has brought valuations down toward more reasonable levels.
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While not overtly cheap, they are in better
alignment with current fundamentals than
they were even late last year.
Areas to watch
• Technical indicators still show that
equities are vulnerable. Defensive sectors
such as utilities and consumer stocks continue to lead (adverse), but short-term improvements can be seen in down-and-out
sectors such as materials (positive). The
bottom line with unfavorable technical
trends during periods of market plunges
is that equities could be one poor data
point, headline, or awkward comment
from the Fed away from another sharp
retreat to the downside.
• Should volatility remain high, it
could begin to weigh on Main Street. If
the pessimism grew widespread enough
to pressure consumption and corporate
capital expenditures, it could cause deterioration in the underlying fundamentals.
Given that stocks/investments are more
broadly owned now than they were a
couple of decades ago, this issue bears
close monitoring.
• The fact that the U.S. is in the midst
of an election cycle with no incumbent
president to reelect only adds to the general
sense of angst. Candidates have a vested
interest in making each citizen disgruntled
about the status quo, in an effort to be
swept in on a platform promising change.
• Capital, which had been on a worldwide search for yield, is seeking safer
havens. The high-yield debt market suffered in late 2015, and the growth versus
value equity tilt has reversed itself in early
2016 as investors seem intent upon hunkering down.
What’s different this time?
Investment industry veterans are quick
to point out that it’s “never different this
time.” Yet secular trends take shape and
play out over long periods. We are in the
midst of a confluence of intersecting secular changes (technological, demographic,
geopolitical, and social sensibility norms)
that could influence investing and portfolio construction in the coming decades.
While it’s tough to accurately predict precisely how they will play out, they bear
observation.
• Central bankers in most developed
and emerging markets have driven yields
on government debt to below zero in an
attempt to revive economic activity in the
wake of the Great Recession. The degree
of intervention in global capital markets
has been so huge that few remember what
life was like without this experiment in
place. Having never been here before, it’s
tough to call what comes next when this
intervention ceases.
• Technological advances have picked
up steam and the era of big data, machine
learning, artificial intelligence, and everything connected to everything else is upon
us. Most traditional business models are
in some form of destruction.
• Demographics: Japan (aging rapidly); China (one-child policy coming to
a halt); and the U.S. (Millennials now the
largest segment of population). As these
trends take hold, changes—in consumption; in preference for ownership versus
participation in the sharing economy; in
comfort with technology; in spend down
versus accumulation of wealth; and in the
need for advanced medical care and solutions—will instigat e changes to regional
economies.
• Daily noise in the markets, prompted
by computerized trading, large pools of
money invested through hedge funds and
other blind pools, tighter restrictions on
Wall Street firms’ ability to take positions
into inventory, and the dismantling of the
specialist system is likely to continue. As
we have noted, however, this interim volatility creates opportunity for those with
a tight grip on fundamental value and an
ability to move tactically.
While predicting markets is a frustrating and often fruitless endeavor, focusing
on the aspects of portfolio construction
one can control, and being ready to move
tactically, can pay off in the long run.
Carol M. Schleif, CFA,
is regional chief investment
officer at Abbott Downing,
a Wells Fargo business that
provides products and services through Wells Fargo
Bank, N.A. and its affiliates
and subsidiaries. She welcomes questions and
comments at [email protected].
MULTI-UNIT FRANCHISEE IS S UE II, 2016
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