Tahoe Market Pulse: 2015 review … and a 2016 preview
January 6, 2016
As 2015 came to a close, global turmoil was intensifying and market volatility was rising. For the year, however, stocks were about unchanged. Or were they?
While the S&P 500 (a capitalization-weighted index) was flat, but an equal-weighted ETF for the same 500 stocks fell 4.3 percent. Broad-based ETFs that focus on dividends were worse still, falling 6 percent or more. Weakness in energy stocks played a role.
The central bank is part of the reason for the market's sluggishness. The Fed finally raised interest rates a quarter of a point and they expect four more increases in 2016. I expect fewer.
With the economy muddling along at a two percent growth rate, there is little reason for rates to rise much.
When rates are persistently low, there is an upward bias to stock prices. That upward bias has been in place since 2009 and it will continue into this year. Low rates mean alternatives will be unattractive.
That, combined with earnings and dividend growth, will act as a tailwind for stocks. There is nothing on the horizon suggesting that interest rates will do anything in 2016 other than remain very low.
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For that reason, I don't see the risk of a significant sell-off. People are underinvested in stocks and the market is still the best place to be. This will help to offset concerns about rising rates, a strong dollar, oil, and slowing global economies.
Stocks are neither expensive nor cheap, which is why they've gone sideways. Sideways is a trend that will likely continue.
A sluggish economy, volatile stock prices, and continued low rates point to a favorable environment for investment-grade preferred stocks. If there were a genuine concern that rates would rise a lot for years (called market risk), those issues would be giving ground.
They are not, nor are Treasurys, a sign that investors don't believe the economy will be strong enough for the Fed to raise rates four times this year, as they have indicated. Investment grade preferreds are the best risk-to-reward opportunity as we head into 2016.
David Vomund is an Incline Village-based fee-only Registered Investment Advisor. Information is found at http://www.VomundInvestments.com or by calling 775-832-8555. Past performance does not guarantee future results. Consult your financial adviser before purchasing any security.
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