Highlights of this Month’s Update:
- Call today for your personal year-end review if you have not already done so!
- Stocks/Equities end flat for November but retain the October gains.
- Corporate earnings are in focus as to future direction of the markets.
- FED watch in full swing for their December meeting and decision on interest rates.
- Effects of a stronger dollar and impact on your travel plans.
- Oil prices-impact on earnings and where do we go from here?
READ ON FOR FURTHER DETAILS……………………………………………………..
Call Today to Schedule Your Year-End Review:
If you have not yet done so, please call us today to schedule your year-end review. Time is running out in 2015 and this is a great time of year to update your overall long term plan and review your personal goals. It’s also the time to move into the New Year with a set plan in place. Our MyWealth financial management and planning system is a great tool for you to track your personal financial affairs as well as keep your long term plan in focus. Call us today for your personal meeting, either in person or by phone!
Historically, stocks have performed admirably during the fall, winter, and early spring. Of course, returns during any particular month may vary considerably.
Case in point- October’s rebound far outpaced the historical average, but it did not prevent investors from nibbling away at U.S. stocks during November. Taken together, the S&P 500 Index is just above the level seen prior to the late August selloff. The S&P 500 was basically flat last month, up just .05%. The Dow Jones Industrial Average eked out a small gain of .32%, and is down .58% for 2015 through eleven months. Many individual stocks, including many of the “blue-chip”, large company stocks are still in negative territory this year with several down double digits. (MarketWatch)
The above chart illustrates the results for the S&P 500 over the past twelve months. (11/30/14-11/30/15, BigCharts.com) There has been very little net change for this period in time, but there has been increased volatility in the past few months.
One of the key drivers of stocks has historically been corporate profits and expectations of corporate profits.
Key Variables that may Influence Corporate Earnings in the Coming Year:
No one can accurately forecast where stocks are headed in the short-term. As the legendary baseball manager Casey Stengel once quipped, “Never make predictions, especially about the future.” It’s a key reason why diversification within and among several assets classes is a preferred strategy by most long-term investors.
Most companies have managed to top conservative analyst forecasts, but more importantly, earnings are set to decline 0.8% in Q3 2015 and are forecast to drop 3.1% in the current quarter (Thomson Reuters as of November 30) before rebounding next year.
Fed Watch and Oil:
Looking ahead in December, we approach a Fed meeting that has been anticipated by the markets for quite some time. For the first time since 2006, the US could see a rate hike by the FED, marking an end to the tough times that still echoed from the financial crisis. The markets heavily expect this outcome; however, some still believe a rate hike will not come until a later time. The main risk is to the Fed’s credibility. If the Fed hikes and a recession were to quickly follow, they would look foolish and misinformed. On the other hand, if the Fed does not hike and the economy consequently booms, they’ll appear late to the game and inflation may begin ticking higher.
According to most data points, the Fed should hike rates in the coming weeks. Assuming this occurs, we strongly believe the markets will absorb this event and remain stable into year end. If the Fed decides to postpone into 2016, the market could become quite volatile, primarily in short-term rates and commodities. Markets could run higher, mainly fueled by higher future inflation expectations. This is not anticipated, given the overwhelming welcome arms the market has signaled to the Fed to indeed hike rates.
So, how will this affect you? Short answer: probably not much. We anticipate the markets to remain stable and drift higher over the next six months while the Fed adjusts to a tighter monetary policy. For the month of December, the S&P 500 has risen at least 1.2%, 90% of the time, which does not account for a rate hike. However, historically rate hikes have been very beneficial for risk assets, so we could see an even stronger month ahead. Past performance does not guarantee future results.
In this current environment, a rate hike should lend to further strength in the US Dollar, which has predominantly been priced in. However, it could continue to become stronger, which will keep inflation subdued, as it has been in recent months.
Looking at the following example, you can quickly understand why the majority of the move may already be priced in. If you plan on traveling abroad, you could benefit from this recent strength. For example, you would have received less than €75 Euros for every $100 USD exchanged in 2014. Today, you could exchange the same $100 USD for nearly €95 Euros. The same can be said if traveling in Canada. Did you know the Canadian dollar had actually become stronger than the US Dollar in 2011? At its strongest that year, it would have cost you almost $1.06 USD for every $1 Canadian. Today, it would only cost you $0.75 USD to exchange for every $1 CAD!
Short-term interest rates may tick up modestly if the Fed hikes, but it should not create much volatility in longer-term rates. For the most part, rates have already pushed higher in anticipation of the Fed’s move, so inaction will most likely see more volatility. While mortgage rates may begin to slowly grind higher, rates should not jump out of the recent trading range, remaining safely below 4.5%. The Fed hiking rates is normal in a growing economy, and it should be viewed as positive. The Fed has been controlling the Fed Funds Rate since the 1950s, and this time should not be seen as any different. We continuously monitor these events and are prepared to adjust for various outcomes.
The strong dollar has hurt revenues at the large multinational companies (FactSet), as sales in local currencies must be translated back into stronger dollars. While the pain of filling up at the gas pump has diminished considerably, the energy sector has been hit hard.
According to Thomson Reuters, energy profits have fallen 57% during the third quarter versus one year ago. Since energy is one of ten sectors in the S&P 500 and it accounts for 7.1% of the index (as of November 30, 2015 per S&P Dow Jones Indices), it has had a significant impact on corporate profits. According to FactSet, weakness in energy has reduced third quarter S&P 500 earnings growth by seven percentage points. Looking ahead, analysts are forecasting an uptick in corporate profits in 2016. It would create a tailwind for stocks, but earnings forecasts going out more than one quarter are dicey at best given the many variables that influence the bottom line. These include oil prices and the value of the dollar.
But these two key assumptions: stability in oil prices and stability in the dollar, are big ‘ifs.’ What if oil plunges to new lows amid a continued oversupply of crude? Are we in a long-term bear market for oil? Possibly, but many variables make it difficult to determine where crude might be headed.
Will Saudi Arabia continue to pump at full throttle? Will geopolitical events in the Middle East affect prices? If prices begin to perk back up, will U.S. oil firms in the shale fields quickly respond with new output and once again depress prices? Oil is priced in dollars when sold around the globe. Will strength in the dollar help keep a lid on prices? Will low prices encourage driving and domestic demand for oil? As you can see, there are many factors that influence prices.
We trust that you have found this month’s summary to be beneficial and educational. As always, we are humbled that you have placed your trust in our firm. It is something we never take for granted. If you ever have any questions about what we’ve conveyed in this month’s message or want to discuss anything else, we are simply a phone call away.
Your TEAM at F.I.G. Financial Advisory Services, Inc.
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1 The Dow Jones Industrials Average is an unmanaged index of 30 major companies which cannot be invested into directly. Past performance does not guarantee future results.
3 The S&P 500 Index is an unmanaged index of 500 larger companies which cannot be invested into directly. Past performance does not guarantee future results.
5 New York Mercantile Exchange front-month contract; Prices can and do vary; past performance does not guarantee future results.