Darren's Blog

A resource for the thoughts and writings of Darren Brennan

March 2016 Market Commentary by Darren Brennan

 

Economic Outlook

 

 

 

It appears to me that the U.S. economy was never in the bad shape that many investors had feared earlier in the year and now the stock markets seem to reflect that sentiment as well. The link between equities and oil prices also helped stock values recover recently since it appears that oil prices may be forming a base or may have already put in a bottom. In addition, inflation is starting to show in the Fed’s data which is pushing the Fed towards more rate hikes this year, but I still think we will see no more than two, and probably just one, rate hike this year. The problem is that the Fed thought we would have a much stronger U.S. economy by now which would have allowed the Fed to raise rates quickly, but Obama’s below trend economy isn’t anywhere strong enough to withstand four rate hikes proposed by the Fed for 2016 without dipping back into recession, and that worried investors. Now, I think investors are coming around to my long held belief that the pace of the Fed rate hikes will be slow and gradual which should help the U.S. economy avoid recession, which is helping to alleviate the fear and uncertainty that has been on investor’s minds. I also think many investors are putting too much worry into the recent fall in oil prices and according to Hartford Funds, since 1984, the S&P 500 Index has had an average gain of 26.92% the year following at least a 50% decline in oil prices. So while I think the U.S. can avoid recession and the data currently leads me in that direction, things can change but I think the overall outlook for the U.S. economy remains positive. And the data backs up my optimism regarding the economy as we recently saw reports that showed January construction spending surged to its highest level since 2007, the February manufacturing report showed improving inventories and orders growth, and auto sales appear to be strong as well.

 

 

 

Outside of the U.S., there are concerns regarding a slowdown in China and we even have negative interest rates in Europe as a way to jumpstart those economies. We are now in a world where central banks are not working in tandem and the end result is major currency fluctuations with the American Dollar rising against most other currencies. In general, it is a good time to be a traveling American.

 

 

 

My outlook for this year remains unchanged as I still believe the U.S. economy appears poised to remain on track to avoid a recession with tepid growth, the Eurozone should be mostly flat with a mixed bag of growing and recessionary economies, and China will continue to slow but I doubt the Chinese economy makes a hard landing.

 

 

 

 

 

Stock/Bond Report

 

 

 

Not much has changed from last month’s writing; the main themes this year are about oil, elections, the Fed, and volatility. The good news is that oil prices appeared to have at least stopped the downtrend and I think the Fed is overstating its expectations of four rate hikes this year. The bad news is that volatility will most likely not go away and should increase this year as we move into the summer months and the political conventions. The big wild card will be who represents the Republicans and can they beat Hillary. Time will tell us who will win, and unfortunately I am still expecting a victory for Hillary, but it appears that she is not the lock in candidate that many had hoped for with Mrs. Clinton, so she may be beatable. One can hope. I will discuss how the elections may increase or decrease the returns from different asset classes later in the year after we see who the nominees are, which I think will be interesting.

 

 

 

Bonds have been the beneficiary of the worry on Wall Street as the yield on the 10-Year declined to around 1.71% recently. I think this flight to safety may be winding down now as investors fears about a U.S. recession start to subside over the next few months. Overall, bonds values have been a good counter balance to the decline in stock values, especially municipal bonds which are still generally enjoying positive returns again this year after a positive 2015.

 

 

 

I think the Fed will either raise rates in March, or they will wait until after the elections to move interest rates, so I am only expecting at most, two rate hikes this year. This should allow the U.S. economy to grow at around 1-2%, which could be a positive for stocks this year. I still think in general equities could finish the year in positive territory, and if the Fed is slow to raise rates as expected, bonds should provide returns that are still better than your average low-yielding money market or CD.

 

 

 

If you become concerned about the volatility this year, please contact my office since we have investments that can reduce or even eliminate volatility in your portfolio without having to put your money in a low-yielding money market or CD. I would be happy to discuss ways we can reduce or even eliminate stock market risk in your portfolio if that is a strategy you are considering.

 

 

 

Just a Thought

 

 

 

“If people don’t occasionally walk away from you shaking their heads, you’re doing something wrong.”

 

-John Gierach, Fly Fisherman

 

 

 

 

 

The views expressed are not necessarily the opinion of FSC Securities Corporation, and should not be construed directly or indirectly, as an offer to buy or sell any securities mentioned herein. Investing is subject to risks including loss of principal invested. Past performance is not indicative of future results. This material contains forward looking statements and projections. There are no guarantees that these results will be achieved. No investment professional or strategy can accurately predict market performance. No investment strategy, such as asset allocation or diversification, can guarantee a profit or protect against loss in periods of declining values.

 

 

 

The bond market involves risk. In general, when interest rates go up, bond values go down and vice versa, and this effect is usually more pronounced for longer-term securities. The S&P 500 Index cannot be invested in directly, and is unmanaged.

 

 

 

Any fixed income security sold or redeemed prior to maturity may be subject to a substantial gain or loss. Depending upon the municipal bond offered, alternative minimum tax and state/local taxes could apply. Generally, municipal bonds generate tax-free income, and therefore pay lower interest rates than taxable bonds. Therefore, municipal bonds may not be suitable for all investors. Please see your tax professional prior to investing.

 

 

 

There is no guarantee that a diversified portfolio will outperform a non-diversified portfolio in any given market environment. The price of commodities, such as gold, is subject to substantial price fluctuations over short periods of time and may be affected by unpredictable international monetary and political policies. The market for commodities is widely unregulated and concentrated investing may lead to higher price volatility. Sales of CD's prior to maturity may result in loss of principal invested. Federal deposit insurance generally covers deposits of up to $250,000 in the aggregate for each depositor in each bank, thrift, or credit union. A customer should ensure that purchasing any insured CD will not bring his or her aggregate deposit over $250,000 FDIC insurance limit. Investors should be aware that there is no FDIC insurance coverage for any principal losses that may be incurred.

 

These links are provided for informational purposes only and FSC Securities Corporation does not endorse or accept any responsibility for the content of these websites. FSC Securities Corporation does not guarantee the accuracy or completeness of the information appearing on the linked pages and does not assume any liability for any inaccuracies, errors or omissions in any information provided on the pages.

 

 

 

There are no guarantees that dividend-paying stocks will continue to pay dividends. Companies may reduce or eliminate the payment of dividends at any given time.

 

 

 

 

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