Published in the January 20 – February 2, 2016 issue of Morgan Hill Life
Dan Newquist
It’s the New Year and time for resolutions and predictions. While I generally take predictions of any kind with a grain (or two) of salt, I prefer to be informed and prepared for developments especially where finances and investments are concerned. Here are six trends to watch for in 2016:
• Presidential Election: Historically, election years have been good to stock investors as investors get excited about what campaign promises might do to the economy. U.S. markets (as measured by the S&P 500) have historically produced a positive return 82 percent of the time in an election year versus 70 percent in non-election years from 1926 to 2014.1 Depending on who is elected president there could be differing impacts on companies and the economy.
• Rising Interest Rates: The Federal Reserve raised the Fed Funds interest rate range by 0.25 percent in mid-December, and they are forecasting that they could increase interest rates by as much as 1 percent in 2016 if economic and market conditions support it. Depending on how quickly rates rise, borrowing costs for everything from auto loans to mortgages will rise as well. On the flip side, we may finally start to see some return from our money market and savings accounts.
• Lower Investment Returns: Rising rates will negatively impact the returns investors receive from bond investments. When rates rise, the prices of currently issued bonds typically go down. And, since interest rates are fairly low, investors may not earn enough yield to offset the losses incurred from declining bond prices. For U.S. stocks, there are many economic bright spots that could help push returns higher, but the currently higher than average valuations on stocks will be a headwind for stock gains in 2016.
• Increased Market Volatility: Markets kicked off 2016 with a significant pull back. For U.S. stocks and bonds, it wouldn’t be surprising to see patterns similar to those in 2015 play out in 2016. In 2015, we saw a good deal of volatility and a stock market correction (i.e., a decline of 10 percent or more from a recent market high). As the Fed increases interest rates, we would expect more up and down movement.
• Diverging Global Monetary Policy: For a number of years, the world’s major economies have essentially been pursuing the same favorable monetary policy of low interest rates and in some cases quantitative easing. The U.S. broke away from this trend in December 2015, since the U.S. economy is in better shape than many other developed nations. The United Kingdom isn’t far behind from increasing their interest rates as well. This will add to investor uncertainty as local central banks will have to operate in an uncoordinated world.
• Uncertainty for Oil and Commodity Prices: During the past 18 months, the price of oil and various other commodities have declined. Lower commodity prices are negatively impacting both companies that operate in commodity- related industries and countries that are major commodity exporters. The predictions for where oil and other commodity prices go seem to be all over the board, so seeing what trend develops this year will be important.
While the inevitable predictions of their impact may or may not be correct, it is worth watching and staying informed about these major economic factors.
Dan Newquist, CFP®, AIF®, Principal & Senior Wealth Advisor with RNP Advisory Services, Inc., a registered investment advisor. Reach him at (408) 779-0699 or [email protected]. Securities offered through Foothill Securities, Inc., member FINRA/SIPC, an unaffiliated company.
Source: Morningstar, Inc. (our calculations). Past performance is not indicative of future results. S&P 500 Index is a market capitalization-weighted index of 500 widely held large cap stocks.
