The Stock Market in 2016
By Jeff Karan, Managing Partner
The stock market is off to one of its worst starts in 40+ years which makes it quite abnormal in the scheme of things. What does this mean for the rest of the year?
To summarize what I’ve read and heard from a wide variety of economists and stock market strategists:• We’re in for a period of higher volatility due, in part, to lower overall trading liquidity for structural reasons;
• The market is up 250% since 2008 and thus, when sentiment shifted, there was a big downdraft;
• Change in sentiment aside, there is a growing gap between the fundamentals of the economy and what the stock market is suggesting;
• Most economists and investment forecasters do NOT believe we’re in a recession or entering one:
o One said, for instance, that there is a risk of recession of 15 to 20% every year, and perhaps its higher this year due to international concerns (oil, slowdown in China, destabilization in the Middle East, etc.), but not higher than 25% given strength of labor markets and strong consumer balance sheets;
o Oil prices are destabilizing one part of the economy (energy sector) but overall is a stimulus for the other sectors (consumer spending and energy sensitive stocks like airlines and other transport);
• The risks are greater to enter recession because the starting point is lower: we’re only growing the economy at 1.5 to 2% GDP growth vs. 3.0% that is more typical post-recession so its easier to go negative from that starting point, but the data doesn’t support that thesis right now;
• Given that the last recession was a “credit” recession, this lower rate of growth is not surprising;
• Most investment strategists believe the market will end up 3-4% for the year, indicating nearly a 20% swing to the upside during the course of the year from today’s levels.
Ironically, I’m more worried about the “consensus” among economists and investment strategists since the consensus is often wrong. Nonetheless, I’m going to go with it since it matches my own view of the economy. And, ultimately, economic fundamentals drive markets and not the other way around!