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Slow Ride (the markets and economy in 2016)

wsandmEntering the second quarter of 2016, the capital markets exhibited a new sense of optimism. The U.S. economy did not fall into recession, China seemed to stabilize (albeit by inflating an already oversized debt bubble) and desperate oil producing nations decided to at least open a dialogue regarding production. All that was needed was for wages, consumption and inflation to cooperate. Although we are only a month into the new quarter, these data sets show few signs of cooperating. In fact, most components point to stagnation or deterioration of these data. It appears as though central bank policy is failing, once again.

Most economists agree that looser business regulations, lower taxes and free trade should improve economic vibrancy. The group think among free market reformers is that these business- friendly fiscal policies are what is necessary. Meanwhile the left chooses to count on monetary policy to do most or all of the heavy lifting within economies, so as to not make fiscal policy changes which could result in reduced social safety nets and greater income inequality. This clearly illustrates a difference in priorities.  I believe it is this difference in priorities which is why economies around the world are stuck in low gear (U.S.), neutral (Europe) or reverse (Japan and, in some ways, China). As much as national electorates say that they wish to vote for change (dictatorial China excepted), what they really seem to want is a change at the top to someone who can maintain or return economies to the old status quo.

My conclusions is: Interest rates should stay low throughout 2016 as the Fed may tighten once, twice or perhaps not at all. Stock prices will probably not be battered by significantly tighter Fed policy, but they might not receive help from a significant pickup in economic growth. The first reading of first-quarter U.S. GDP printed at an annual economic growth rate of 0.5%. The expected second quarter “rebound” is forecast, according to the Bloomberg survey of economists, to print at 1.8%, with little pickup later in the year. I believe that pro-growth fiscal and regulatory policies are necessary for stronger growth and higher interest rates, but the political climate in the U.S. does not argue for such changes. I expect more slow economic growth, weak wage growth and low interest rates through 2016.

In this environment, I believe investments (and advisors) should make every attempt to avoid chasing returns and stay within suitability parameters. Investors which look “cheap” may turn out to be falling knives. Feel free to contact me directly with any questions.

(1) High yield/junk bonds (grade BB or below) are not investment grade securities, and are subject to higher interest rate, credit, and liquidity risks than those graded BBB and above. They generally should be part of a diversified portfolio for sophisticated investors. (5) The economic forecasts set forth in the presentation may not develop as predicted and there can be no guarantee that strategies promoted will be successful. (6) The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. (7) All indices are unmanaged and may not be invested into directly. Investing in securities is subject to risk and may involve loss of principal. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. Securities offered through LPL Financial. Member FINRA/SIPC. Investment advice offered through Private Advisor Group, a registered investment advisor. Private Advisor Group and WS&M LLC Bond Squad are separate entities from LPL Financial.

 

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