On yesterdays High Rock weekly webinar (http://www.highrockcapital.ca/current-edition-of-the-weekly-webinar.html)
we announced our key themes for 2016. I thought I might share those with you today:
1) Volatility will continue to create uncertainty
Uncertainty will continue to create volatility.
However one wishes to look at it, uncertainty about what to expect in the future forces decision makers to postpone economic decisions and that negatively impacts economic growth.
2) Can the US Economy Survive The Global Economy (and China)?
Is the Federal Reserve's optimistic outlook on the US economy and its expectations of raising interest rates possibly 4 times through 2016 realistic? Recent data certainly suggest that the final quarter of 2015 will come in well below initial forecasts based on continuing slow growth in the manufacturing sector.
Will the slowing of the global economy be an anchor that drags the domestic economy down? China will be the wild card. Thus far the US consumer's buying of automobiles (financed at low interest rates) and dining out at restaurants has been fueling domestic economic growth, but can this continue, especially if US interest rates rise further?
3) Commodity Prices
Inflation targets are the mandate of all central banks, and commodity prices have been driving inflation down and therefore forcing the hands of central banks to be more stimulative (other than the US Federal Reserve). Will supply continue to outweigh demand to keep prices low? Cyclical economic history suggests that supply will adjust to lower demand and that eventually, demand will pick up to outweigh supply when the economic growth starts to pick up. Is this part of the 2016 scenario? At the moment, it is hard to see this, but as 2016 progresses, it may in fact become more of a realistic expectation.
4) Central Bank Monetary Policy Divergence
Back to the US Federal reserves plans to raise rates, possibly 4 times in 2016 while other central banks are more inclined to continue stimulative monetary policies. This only adds to the uncertainty, so circle back to number 1.
5) Geo-political Tensions
It appears that these are on the rise: not only terrorism raising its ugly head, but also escalation of Middle East issues and the concerns as to whether the UK will exit the European Union and whether Greece will survive in the Euro. Add North Korea to the list with its apparent successful test of a Hydrogen Bomb earlier today. More uncertainty.
6) Bond Markets Will Lead Other Financial Markets
Nothing new here: Bond markets are bigger and smarter than most other financial markets: High Yield bonds turned lower early last year, equity markets followed in August. Government bond markets got volatile in July, equity markets followed in August. So keep a close eye on the bond markets for further clues.
7) Equity Markets Remain Expensive
If you follow this blog regularly, this will be no surprise (at least I am consistent).
We follow a number of metrics that give us clues to the value of equities (fundamental) and what is influencing short-term trading (technical). Low interest rates have forced investors into equity markets driving prices to unrealistic levels. We are off of the highs from last May, but still have some correcting to do before we get close to more realistic value levels.
8) We Will Continue To Be In A Low Return Environment
...Until economic growth improves, corporate revenues and earnings growth improves, inflation rises and interest rates rise.
Adjust your expectations accordingly.
Scott Tomenson,CIM Managing Partner, Chief Investment Strategist