Close to 20% of stocks in the S&P 500 are in bear market territory down more than 20% year to date. If you didn’t own any of the FANG stocks, (Facebook (FB)*, Amazon (AMZN)*, Netflix (NFLX) & Google (GOOGL)*, 2015 was probably a year to forget.
With investor angst at highs here are:
5 questions investors want answered before adding money to the market?
- Will consumers start spending their gas savings? – So far the windfall at the pump doesn’t seem to be making its way back into the economy. Morgan Stanley reports that consumers are receiving $80 Billion in annualized savings. If my trip Wednesday, just two days before Christmas to the Westchester County Mall in New York is any indication, the extra money isn’t finding its way into the cash registers of anchor retailers. Foot traffic was light and unlike previous years I had no trouble finding a place to park.
- Will oil finally bottom and if it doesn’t what does it mean for financial assets tied to the energy complex? – Already we are seeing the first wave of defaults in the oil patch. Will the domino effect continue to hit junk bonds and in turn local government tied to the fortunes of oil? Alaska is already looking at establishing an income tax for the first time in 35 years. Speaking to the Wall Street Journal, Bank of America CEO Brian Moynihan said; “the bank is closely monitoring the 9% of consumer loans in ZIP Codes that are heavily dependent on the oil industry.”
- Will CEO’s continue to rely on financial engineering to prop up earnings or will they start investing the cash flow back into their companies? – The continued reliance on buybacks and other financial engineering gimmicks has been a boon for stocks in recent years. However, without revenue growth the story always ends the same. Decay and stagnation take over forcing companies into a secular decline. One look at the poster child of financial engineering, (IBM) makes the point. Some like myself believe the $13 Billion in annual buybacks could have been put to better use. Larger investments in R&D or increased M&A might have stopped the bleeding.
- What will the pace of Fed hikes look like in 2016? – December marked the first time in 9 years the FED lifted rates ending an era of unprecedented Fed policy. Taking rates to zero and launching several quantitative easing programs expanded the Fed balance sheet to levels few would have thought possible. It’s important to understand the Fed has only taken their foot off the accelerator. Policy is still accommodative and likely to be so for some time.
- How strong will the U.S. Dollar be in 2016? – Dollar strength creates a headwind for U.S. multi-nationals as their goods become less competitive with each move higher. For most of 2015, the Dollar remained in a trading range unable to breach its March highs. It’s important to remember the dollar doesn’t live in a vacuum and currencies are relative. Even with a Fed hike looming the U.S. Dollar took a big hit after traders determined Draghi’s recent rhetoric was less dovish than originally thought. Everyone, looking for a repeat of “whatever it takes” was disappointed.
Jim Cramer likes to say “it’s always a bull market somewhere” and most years that’s true. I like to narrow it down a little further believing there are always some stocks in a bull market with real growth and or value to offer shareholders. Despite concerns about earnings and a host of other issues 2016 should have its share of opportunities for investors.
Predictions
Market predictions are fraught with uncertainty as most made from last year including yours truly didn’t pan out as predicted. It’s the time of year when strategists look into their crystal ball coming up with an earnings estimate for the S&P 500 and then assign a multiple to those earnings giving you a price target. Markets are a living breathing animal so other factors like quality of earnings, interest rates, and political uncertainty all weigh on the final outcome.
* At the time of publication funds managed by David Nelson were long FB, AMZN and GOOGL
