APRIL 5, 2016
Last quarter we wrote about how stock markets were rather boring in 2015 finishing the year relatively flat from January 1 of 2015. Welcome to 2016. The stock market started descending right out of the gate, dropping 10% to 12% by mid-February, only to come charging back finishing the first quarter slightly higher than where we were on January 1. For a time there in early February many were getting that sinking feeling “here we go again”. We advised to stay the course and maintain calm as the domestic economy appeared to be on good footing and that the slowdown in China and overseas economies was likely to be contained. So here we are on April 1 with markets on solid ground and investors once again thinking “everything is going to be alright”. We have to admit it would have been nice to end the quarter up 1% to 2% without all of the drama in between. Unfortunately it doesn’t work that way. These periodic dips and shakeouts are healthy for the markets, flushing out speculation and those investors that are “faint of heart”, if you will.
Much has changed in the past few months and some of it for the better. We spoke in earlier letters about the weakening of the stock market’s internal dynamics, where a handful of stocks were going up whereas the majority of stocks were in a downtrend. The market plunge in January and early February alleviated this situation to some degree. Many stocks are still 20% or more below their respective 2015 highs, but the market as a whole has been advancing in a healthy manner. The U.S. economy continues to trudge along in modest growth mode. This isn’t an entirely bad situation, though many wish growth would notch up to a higher gear. Notching the economy up to a higher gear would likely produce some unwanted side effects. Namely the Federal Reserve pushing short term interest rates higher in an effort to control inflation. This usually is a phenomenon that precedes economic recessions, something none of us wants to see with the meltdown of 2008-2009 still fresh in mind. Inflation remains well contained and energy prices seem to have found a bottom. Many analysts feel that a barrel of oil needs to stabilize in the $50-$60 per barrel range. Below that and many energy companies will eventually face insolvency; above that and the price of a gallon of gas heads back above $3. Another positive for corporate earnings growth is that the appreciation of the U.S. dollar against the currencies of our competitors is slowing. We spoke earlier about how restrained corporate earnings have been because the U.S. dollar has been so strong. As this reverses, our domestic companies that sell products overseas will get a boost to their earnings, perhaps dramatically so as the dollar appreciated rapidly over the past few years. This in itself could be a huge swing as what was formerly a large drag on earnings now becomes a tailwind.
To summarize, GSB Wealth Management’s view is that current fundamentals are pretty solid and should this continue, we may expect the stock market to finish the year with solid gains, meaning 5% to 10% upside from present levels. Clearly there are manifold variables that could throw cold water on our thought process, the first being the upcoming presidential election. We have all been amused (should we say disappointed) with the rhetoric and conduct exhibited by our presumed November candidates. Hopefully once the primaries are over the electees will calm down and actually lay out their plans of what they hope to accomplish and how they plan to get there. Other variables include the economies and currencies of our global partners and competitors. Instability in these areas can lead to instability on our shores, even if it is more psychological than actual, as we recently witness in January and February.