As 2015 draws to a close, we wanted to remind investors of a key December event and preview our 2016 outlook. Here are a few things to keep an eye on:
Investors should be aware of the 2-day Federal Open Market Committee (FOMC) meeting, beginning on Tuesday, December 15, with a policy announcement the next day. The Fed is expected to begin raising interest rates from current historic lows, the first increase in nearly ten years. While an increase is not set in stone, the only data points with the economic “heft” to forestall a rise are the November jobs report, set to be reported on Friday December 4th, and the November retail sales report on Friday December 11th. Bad results from either or both of these indicators could derail an increase. That said, we think the Fed recognizes that “emergency” levels of short term rates are not appropriate for an economy that has been recovering for more than 6 years. They will move.
The state of China’s economy is concerning to investors for many reasons, not least of which is the growing global glut of raw materials sparked by fading Chinese infrastructure demand. The Chinese are simply not building as many apartment buildings, airports, dams and railroads as they were 3 years ago. As a result, economic growth in China has fallen in half over the past 18 months, resulting in excess supplies of iron ore, copper, nickel, coal and other materials. The consensus remains that the Chinese economy isn’t going to fall apart, but a sudden revival doesn’t appear likely either.
The 2016 Presidential election is top of mind for many investors, but we think excess attention and analysis this early in the cycle is a waste of time. We’ll really need to begin paying attention during the party conventions next summer. Remember, a lot can happen after Labor Day (Benghazi in 2012 and John McCain’s infamous return to Washington to “fix” the economy in 2008), so keep your analytical powder dry till then!
The Stock Market
For next year, we’re again focused on tepid corporate earnings growth. Revenue growth has been exceedingly hard to come by for U.S. multinationals, mostly due to a very strong dollar. So many firms have been forced to “engineer” their way to higher earnings per share via buybacks and debt refinancing. We’re anticipating that 2016 S&P 500 earnings will once again come in below consensus expectations (analysts are congenitally bullish), resulting in a year-end 2016 fair value estimate for the popular index of about 2100. It closed the month of November at 2080. Other than some ongoing overvaluation of growth stocks, we think there are few “extremes” in the market worth calling out as a major opportunity or risk. All eyes are on the Fed as the New Year approaches.