Our outlook for stock and credit markets continues to be cautious as we continue through 2016. We began 2015 with the investment thesis that it would be the year that “Main Street outperforms Wall Street.” This theme seemed to play out, as financial assets experienced decreasing values and increasing volatility while the U.S. economy continues to be steady. As we look out into 2016, we are cognizant that global markets are playing an increasingly important role driving valuations of U.S. financial assets. Last January’s historic rally in long-term Treasury bonds was led by a sharp decline in European bond yields. With negative short-term interest rates now commonplace across the Eurozone, U.S. bond investors need to maintain a close eye on global interest rates for clues about where U.S. rates are headed. With that said, opportunities do exist to generate solid returns and pockets of long term value can still be found.
Wider spreads for corporate and structured securities during 2015 improved valuations and turned our outlook more positive for credit risk despite global economic headwinds. Credit markets have clearly shown cracks in 2015 but we expect growth in the domestic economy to remain strong enough to support current valuations and extend the credit cycle. Challenges will persist for energy and metals & mining names as commodity prices may rebound modestly but not enough to avoid defaults among highly levered borrowers.2015 Actuals and 2016 and 2017 Forecasts
We expect Treasury rates to move modestly higher in 2016 in response to Federal Reserve tightening and additional global central bank selling. Interest rate increases at both ends of the yield curve will be limited by ultra-low sovereign bond rates in Europe and Japan. We expect higher inflation readings in 2016 as the benefits of falling commodity prices begin to fade and the housing price component of CPI (owners’ equivalent rent) to maintain its upward trajectory. Wage increases should also be supported by declining availability of workers.
Performance for U.S. equities is expected to be more challenging as the stronger dollar, wage pressures and higher borrowing weigh on corporate earnings. Moderate interest rate increases will limit the size of the equity sell off but higher volatility will persist as transitions between investor fear and greed are happening more rapidly.
Continue to follow The Long View Blog as we share our perspectives and insight on the financial markets and global economies as we continue through 2016.