Stock Market Smarts: Put Safety First in 2016
The worst start in Wall Street’s history does not portend well for the year ahead.
Well, that was rather ominous.
The worst start to a New Year in the history of Wall Street does not portend well for the coming months. If what happened so far this month is any indication, 2016 looks like another rough year for investors. I wish I could say those big sell-offs spooked by events in China were just an aberration but I can’t. There are very few bright spots on the horizon.
The root of the problem, I believe, goes back to the years immediately following the Great Recession of 2008-2009. Stock markets rallied in anticipation of a global economic recovery that has never truly materialized. Prices got ahead of themselves to the point where even after last year’s mediocre results the S&P 500 still looks expensive.
The situation has been exacerbated by the bitter battle over oil market share that has resulted in the lowest prices since 2008. Compounding the malaise is the economic slowdown in China, the on-going weakness in commodity prices, and the strong U.S. dollar, which is now beginning to have a deleterious effect on the American recovery.
More grief for the TSX.
It would be nice to see the TSX rally from last year’s dismal performance. But we need a catalyst and it’s hard to see where that will come from.
The energy sector (18.5 per cent of the index weighting) remains in the grip of the global price war. The materials sector (9.75 per cent) continues to be dragged down by depressed demand and pricing.
A slightly better year on Wall Street.
The U.S. economy is in better shape than Canada’s although the strong greenback is hurting the profitability of companies with a large international presence.
History suggests that the S&P 500 should do better this year than in 2015, when it slipped by 0.73 per cent. An article in the Wall Street Journal last week noted that after years when the index was virtually flat, it posted a double-digit return in the following 12 months in all but one instance.
No joy for oil.
Low oil prices have resulted in increased demand but oversupply still remains a huge price depressant. Until a balance is achieved, which may be two or three years away, energy companies will continue to struggle. This is a situation in which a black swan, such as a shooting war between Saudi Arabia and Iran, could dramatically change the scenario.
Europe keeps surprising.
European stocks did better than expected in 2015, with the Stoxx Europe 600 up 6.8 per cent, and we could see a repeat this year, despite the weak start.
Emerging markets will struggle.
The year just ended was a bad one for emerging markets.
The MSCI Emerging Markets Index is down 18.4 per cent in the past year and there is no reason to expect 2016 to be any better given the problems in China, Russia, Brazil, and elsewhere.
Bonds still worth holding.
The U.S. has started to gradually raise interest rates but most of the rest of the world, including Canada, is maintaining a low rate policy in the face of weak economic growth.
Bad times for the loonie.
Absent a recovery in the oil price, it’s difficult to make a case for a stronger loonie.
Cash is king.
During times of market turmoil, there is nothing wrong with holding cash.
Right now, that would be U.S. cash, given the grim prospects for the loonie. Cash doesn’t provide much return but it cushions the portfolio against loss, provides liquidity when buying opportunities appear, and allows you to sleep better at night.
The bottom line is that capital preservation should be your main priority this year. There are times to be daring in the market and times to hunker down. This is a hunkering year.