As we enter the middle of the third quarter of 2016, we thought we’d share an overview of our current thinking about the economy and the stock market this year. Our next blog will address the bond market.
Global equity markets have been in a “bull market” (market in which share prices are in an extended uptrend) for the last 7½ years, since March of 2009 with the U.S. performing best among global indices. The U.S. market (S&P 500 index) is now in its third longest bull market in history.
An abstract closeup of two gold cast statuettes depicting a stylized bull and a bear in dramatic contrasting light representing a financial market trends on an isolated dark background
We view the current bull market as being in the latter stages of its life cycle. The valuation of U.S. stocks can be described as extended (though not in bubble territory yet). While U.S. corporate earnings have declined for the last four quarters, and sales growth has slowed, there are signs of improving conditions with forecasts for earnings moving back to positive territory in the latter half of 2016. As a result, we are cautiously positive regarding the U.S. economy and for U.S. stocks. We continue to favor U.S. over both Europe and Asia except for an allocation to Japan. Global issues, including BREXIT, have caused uncertainty in global markets making it unlikely that the Federal Reserve will raise interest rates quickly, if at all, in 2016. We continue to favor U.S. stocks, particularly dividend-paying stocks, over the rest of the world and believe the U.S. market can move higher for the rest of 2016 and into 2017 based on strong momentum and technical market indicators. However, we also expect more market volatility in the form of small downturns and corrections of between 10% and 20% as part of a normal market environment.
A point in favor of investing in Europe, Asia, and emerging markets in the future: An end to the bull market in U.S. stocks does not necessarily mean the end to the global bull market. Stocks are generally cheaper in nearly every locale outside the United States. Therefore, future weakness in U.S. stocks could simply mean a shift of investor focus from U.S. stocks to foreign stocks in search of more reasonable valuations and growth potential. We continue to look for investment opportunities outside the U.S. for signs of this transition.