Market Watch - January 2016

Submitted by Academy Wealth Advisers on December 17th, 2015

Written by Rick Welch on January 4, 2016

We are pleased to provide you with our quarterly newsletter featuring the status of our investment class weightings, our interpretation of recent data and our outlook for the future. If you have any questions about any topic, we hope you will not hesitate to contact us.

Status of our Investment Class Weightings

Changes from our October 2015 Market Watch are noted in italic.

US Large Cap Sectors –

Overweight – Financials, Healthcare, and Technology

Neutral – Consumer Discretionary and Consumer Staples

Underweight – Energy, Industrials (↓) and Materials

No Weighting - Utilities

US Mid and Small Cap – Maintain all weightings.

International Developed Markets – Maintain all weightings. Increased focus on Europe.

Emerging Markets – Maintain all weightings.

Alternative Strategies – Maintain all weightings.

Multi-sector Bond Funds – Maintain all weightings.

Investment Grade US Corporate Bonds – Maintain all weightings

High Yield US Corporate Bonds – Maintain small positions (reduced in Q4 2015).

Investment Grade Municipal Bonds – Maintain all weightings.

Data – 2015 was a challenging year for investors as the major equity indices showed losses. For 2015, we see the following results: US Large Cap – DJIA (-2.23%), US Large Cap - S&P 500 (-1.72%), US Small Cap - Russell 2000 (-5.71%) and International - ACWX (-7.92%). Barron’s writer Ben Levisohn recently described the market “as having been violently flat, which is a contradiction in its own right.” In a market that moved little during the year, the S&P 500 had 72 days of gains or losses of 1% or more, compared to just 38 days in 2014. Domestic economic data for Q4 was generally mixed. GDP for Q3 came in at +2.0%, which followed a stronger +3.9% in Q2. During Q4, the yield on the benchmark 10-year US Treasury rose from 2.06% to 2.27%. Job growth in October and November was strong and the national unemployment rate fell to 5.0%, in line with the pre-recovery target of the Federal Reserve. New weekly unemployment claims averaged 268,800 during Q4 (better than the 273,000 in Q3) suggesting a continued firming of the domestic job picture. Consumer confidence, as measured by the Conference Board, rebounded in Q4 suggesting that consumer confidence remains at elevated levels. Retail sales over the last 4 months have been slightly elevated and should limit gains made during the crucial Christmas holiday shopping season. The December Business Outlook Survey by the Federal Reserve Bank of Philadelphia showed some improvement from a multi-year low in Q3 for current business conditions, while optimism for future conditions (6 months in the future) in the manufacturing sector remains muted. Data from the housing sector remains volatile, however, the picture suggested is one of improving conditions. New home sales (+4.3%) and housing starts (+10.5%) were strong in October.

Outlook – “A return to robust and synchronized global expansion remains elusive” is how the International Monetary Fund (IMF) recently characterized its projections for global economic growth in 2016. The fund’s economists project economic growth of 3.6%, up from 3.1% in 2015 and in line with the 3.5% average from 1980 through 2014. In order to meet that projection, we will need to see improved conditions in the Eurozone, stability in the emerging markets, a soft landing by China and continued moderate growth here in the United States.

We think one of the best opportunities for developed markets outside of the US may be the Eurozone. In 2015, we saw a foundation for progress rooted in accommodative monetary policy, encouraging growth trends and stabilization in southern Europe. Household consumption and retail sales are trending upward and corporate profits are finally improving. Many European exporters will continue to benefit from the euro’s weakness and lower input costs (Europe is a net importer of commodities). On the political front, an October referendum in the United Kingdom will decide whether or not to remain in the European Union. A “No” vote would be a shocking statement with both political and economic ramifications.

Economic growth in China is projected to slow from 6.8% in 2015 to a still admirable 6.3% in 2016. China will continue to struggle as the focus of its economic growth changes from government infrastructure investment to domestic consumption. While many developed nations depend less on exports to China, the emerging markets, particularly those rich in resources (examples include Brazil, Chile, Indonesia, Malaysia and Thailand) have come to depend heavily on China as a customer. Any further slowdown in China will have negative ripple effects throughout the emerging markets of the world. 2015 was the third consecutive year that emerging markets underperformed developed markets. As for the other members of BRIC (Brazil, Russia, India and China), both Brazil (political crisis, plunging commodity prices and corporate corruption) and Russia (economic sanctions and falling oil prices) may remain in recession for much of 2016. India will again be a bright spot with economic growth expected to exceed 7% in 2016.

The picture here in the US will again be one of slow-to-moderate economic growth, low inflation and generally accommodative monetary policy. Now that the initial rate hike is behind us, we think the Fed will look for 2 or 3 more hikes, each of about 25 bps, during 2016. The markets will watch closely and react to the perceived path of the federal funds rate over time. We are pleased to note that in 2015, against the backdrop of slow-to-moderate growth, the US economy benefitted from a resilient consumer, strong job gains and a rebounding housing market. We think this trend, should it continue, will support share price gains in consumer related and financial sectors in 2016. In contrast, weak commodity and oil prices will weigh on the embattled energy (12% of S&P 500) and materials (4% of S&P 500) sectors. The big question here is how far can oil fall? We have seen recent estimates as low as $25/barrel. During 2015, the strengthening US dollar hurt US exporters and resulted in a secondary dampening of expectations in the Industrials (12% of S&P 500) sector. Though history is not always a good teacher, we expect that diverging monetary policies (tightening in US and easing in Europe and Japan) will eventually cause the dollar to weaken, as seen in the last two rounds of monetary tightening that began in February 1994 and June 2004. A weaker dollar will help US corporations battered by the surging greenback which, in 2015, reduced the profits of S&P 500 companies by 8% or $93 billion.