Outlook 2016: Moving Ahead in Choppy Waters

DEWITT, Mich. - Feb. 23, 2016 - PRLog -- The past year was a good reminder that market fluctuations are a normal part of investing. While we expect bumpy markets in 2016, our outlook is better than you might think. The trends this coming year are similar to crosscurrents, or waves that move in opposite directions. Some are positive, moving with you, and some may present challenges while you’re trying to stay on course toward your financial goals.

What does that mean for your investments in 2016 and beyond? You don’t have to feel lost at sea, but you may have to make slight adjustments to keep moving forward.

Here are the crosscurrents to keep on your radar in 2016:

  • The Federal Reserve (Fed) begins to hike short-term interest rates for the first time in a decade

  • International growth disappointed in 2015 but should improve slightly

  • Continued modest U.S. economic growth

  • Improving corporate earnings, especially if oil prices stop falling and the dollar continues to rise moderately

Navigating these ongoing and opposing changes may require more adjustments than in past years, so here’s a guide to help stay on course in 2016.

Outlook for Stocks

After below-average returns in 2015, we believe stocks are positioned for a better 2016 if global economic growth improves and corporate earnings rebound as we expect. Although stocks aren’t inexpensive, we think large-cap U.S. and developed-market equities (stocks of large companies) are reasonably valued and attractive. Adding small- and mid-cap stocks can help keep your portfolio well-diversified and on track toward your goals.

Here’s what to watch in the coming year:

  • Modest U.S. economic growth
  The economy has been resilient through more than six years of expansion, and we expect growth to continue at around a 2.5% pace. Consumers have reduced their debts, and job openings are at their highest level since 2000, supporting further economic growth.

  • Slowly rising earnings
  S&P 500 earnings were essentially flat in 2015. But we think company earnings will return to modest growth in 2016, based on still-slow revenue growth and cost cuts. Over time, earnings growth is one of the key supports for rising stock prices.

  • Low oil and commodity prices
  With the sharp drop in oil prices, consumers have more money to spend and companies benefit from lower costs. Although it is taking longer than expected, low oil prices in the past led to faster economic growth in the U.S. as well as Europe, Japan and China – all oil importers. We don’t expect commodity prices to rebound sharply or soon, which is why we recommend only small allocations to emerging-market and commodity investments.

  • Brighter international outlook
  Europe struggled in 2015 with terrorist attacks, refugees, a Greek debt crisis and slow growth, while Japan’s economy returned to recession. We think continued efforts to boost global growth are gaining traction and will help bolster international developed-market stocks in 2016 and beyond.

Outlook for Cash and Bonds

We expect still-low but slowly rising interest rates in 2016, as the Fed finally starts to raise short-term interest rates. Make sure you have enough cash to cover your short-term spending needs. Also, keep 85% of your fixed income in short- and intermediate-term bonds to reduce your portfolio’s interest rate sensitivity, and improve your fixed-income diversification with an appropriate amount in high-yield bonds.

The Fed said it will raise short-term interest rates if the economy continues to improve. But we think the pace will be modest and slow, especially if inflation remains low. Long-term rates are also likely to rise modestly and slowly; over the year following the first Fed hike, bond returns have averaged almost 4%. Interest rates in the rest of the world remain below U.S. rates, keeping downward pressure on them.

Start Off with Balance

Crosscurrents can create volatility as conflicting trends collide. By starting the year with an appropriate mix of stocks and bonds, you can adjust nimbly as markets move. The recent rise in equities may mean your portfolio has a larger amount in stocks than you desire. Check with your financial advisor to make sure your portfolio has an appropriate mix of stocks and bonds.

Here are three ways to prepare for the year ahead:

  1. Review your risk tolerance and goals.
  We think there’s more uncertainty ahead, ending four years of calm waters. Be sure to stay focused on what you can control by aligning your investments with your goals.

  2. Ignore the election-year uncertainty.
The outcome of 2016 elections could change the policy outlook, but don’t use this as a reason not to invest. Many proposed policies won’t be enacted, and those that are will take time to implement.

  3. Volatility offers opportunities.
The market experiences on average at least one decline of 10% and several dips of 5% or more a year. If you’re prepared, you can use these as opportunities to add quality investments at lower prices.

Successfully staying on course through 2016’s crosscurrents may require some short-term adjustments to your long-term strategy. If you haven’t reviewed your investments recently, your financial advisor can help ensure you’re prepared.

Important Information:
Investing in equities involves risks. The value of your shares will fluctuate, and you may lose principal. Special risks are inherent to international investing, including those related to currency fluctuations and foreign political and economic events.