January 5, 2016

January 5th, 2016

Outlook 2016

The job of economic forecasting is very difficult.  In an effort to create a base line (which we will update throughout 2016), let’s take a look at what a widely read magazine, “The Economist” has to say on the topic of the 2016 Global Wealth Forecast:

“EMERGING markets have given the global economy most of its muscle since the recession ended in 2009. But in 2016 rich countries will account for their largest share of global growth this decade. The BRICs are in a sorry state. Brazil’s government has been both incompetent and corrupt. Russia’s has been no better, with a dose of military malevolence thrown in. China will perform reasonably well in 2016—if you believe the government’s numbers. By that reckoning, its GDP will rise by around 6.5%. The reality almost certainly will be lower. China is mired in debt and has mismanaged its currency and stock markets, sending shocks through the global economy. India looks perkier: it will grow by more than 7%. But that is worse than its average of 8.5% growth between 2005 and 2010. All said, the BRICs will make up only 16% of worldwide growth in 2016.

Against all this, the rich world will look solid, if unspectacular. America’s economy will expand by around 2.5%, and the American jobs machine will crank out at least 2m new positions for a sixth straight year—the first time that has happened since the 1990s. Europe will no longer be threatened by recession or deflation, and the euro zone’s most obvious time-bomb, Greece, has been defused for now.

The world economy as a whole is forecast to grow by 2.7% in 2016, and it hasn’t managed an increase of more than 3% since 2011. Save for America, 2016 will be another year of repair, recovery, reform and risk for most countries.”

Personal Perspective

THINGS ARE BETTER THAN THE NEWS MEDIA WOULD HAVE YOU BELIEVE.  Modern media is overwhelming pessimistic.  They focus on sensationalism, scandal, gossip and tragedy.  Modern news and media outlets “preferentially feed us negative stories because that is what our minds pay attention to.” Apparently there is a good reason for this; our senses bring in far more data than we can possibly process, and, because survival is the most important driving factor in our evolution, this data is fed first through an ancient sliver in the temporal lobe called the amygdala. The amygdala is our early-warning detector, sorting through data to see what might harm us. It is therefore entirely explicable that we preferentially look at negative news, and almost as obvious that profit-driven media outlets would capitalize on this instinct.

How and why the world is going to become a better place? Highly respected forward thinkers have studied trends and see a bright future particularly due to exponential technological growth.  These trends show how life expectancy, global connectivity, access to resources and general quality of life are all on an upwards curve.


The Markets Last Week

When the whistle blew at the close of trading Thursday, New Year’s Eve, the stock market finished a disappointing week and year, with both posting a nearly 1% loss. In light of the optimism that rang in 2015, there was little joy on Wall Street.

The annual drop was the first since 2008. So much, too, for the traditional Santa Claus rally: Stocks fell 1.8% in December. In quiet, holiday-shortened trading last week, equities moved in lockstep with oil prices. Oil ended at $37.04 a barrel, down 3%, and off 31% for the year, not far from seven-year lows. The Dow Jones Industrial Average lost 0.7%, or 127 points, to 17,425.03 on the week. In 2015, the Dow limped to a negative 2.2% finish. The Nasdaq Composite Index, replete with strong tech stocks, fell 0.8% last week to 5007.41. For 2015, it finished in the black, up 5.7%.

Given the problems faced over the past 12 months—weak corporate earnings, declining commodity prices, and slow global growth—the fact “that the market finished essentially flat is a testament to its resilience,” avers Douglas Coté, chief market strategist at Voya Investments.

Energy was “the” story in 2015, according to Jonathan Golub, chief equity strategist at RBC Capital Markets. The price of oil “significantly affected both its own sector and the rest of the market.” It’s no coincidence, he adds, that the market’s poor 2015 performance reflected weak growth in the S&P 500 index’s earnings per share.

In 2015, stock gains weren’t shared evenly. The market-cap-weighted S&P 500 index was boosted disproportionately by a handful of successful big caps. Jessica Binder Graham, a Goldman Sachs analyst, identified how many points these performers contributed to the S&P 500 index level of 2044: Amazon (AMZN), 15.8; Alphabet (GOOGL/GOOG), formerly Google, 15.8; Microsoft (MSFT), 8; Facebook (FB), 6.5 points. If you exclude these names, along with four other big-cap gainers, the S&P 500 would have been down 4%.

The average S&P 500 index stock was down almost 4%, according to Bespoke Investment Group. The narrowness of 2015 gives pause for this year (Source: Barron’s Online).

The Numbers

Returns through 12-31-2015 1-week Y-T-D 1-Year 3-Years 5-Years 10-Years
Bonds- BarCap  Aggregate Index   0.0     .6      .6     1.4     3.2     4.5
US Stocks-Standard & Poor’s 500    -.8   1.4    1.4   15.1   12.6     7.3
Foreign Stocks- MS EAFE Developed Countries    -.2   -.8    – .8    5.0    3.6     3.0

Source: Morningstar Workstation. Past performance is no guarantee of future results.  Indices are unmanaged and cannot be invested into directly.  Three, five and ten year returns are annualized excluding dividends.

Motivational Quote of the Week

“Start where you are. Use what you have.  Do what you can.”

 – Arthur Ashe

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