4th Quarter 2015 Update - Key Points
Historically, the first interest-rate hike by the Federal Reserve is not the start of a market or economic downturn. Typically, equities have performed well during the period of immediately after the initial hike, as the economy gathers strength. We believe the pace at which the Feds will raise interest rate will be slow due to low inflation and a weak global economy. One possible effect of this would be some investors may have a better outlook about monetary policy and the U.S. economy which, in turn, may boost investor confidence.
Global economic growth remains apathetic as China and other emerging markets face recessionary difficulties. China is the world’s largest trader and consumer of commodities and its faltering growth has had a negative impact on the global trade. Currently, exports directed towards North American and Europe are doing better than those that rely on import demand from China and Asia. Leading economic indicators are suggesting that the U.S. more than likely remain in a modest mid-cycle expansion in the near-term. Global weakness will more than likely soften even further for the external-oriented sectors of the U.S. However, the much larger consumer sector continues to be advantageous due to the labor markets tightening and a growing positive income outlook.
Bonds are the topic at hand due to the current interest rate environment. Typically, when interest rates rise, bond values decrease and vice versa. As mentioned above, interest rates may be on the slow rise. Managing both interest-rate and credit risk is critical at this point and a multi-sector fixed-income strategy may provide consistent downside protection. Municipal bonds have potential fiscal challenges, but state revenues have continued to improve the fundamental framework for these types of bonds.
U.S. stocks sold off into a correction during the third quarter. Utilities were the strongest performers, while commodities ended up with the largest losses. Declining corporate profits have been largely due to declines in the energy sector profits. Historically, modest slowdowns in earnings growth have usually coincided more with market corrections rather than bear markets. This might mean that the outlook for solid domestic profits would avoid a severe bear market. U.S. valuations are slightly elevated but within fair-value range, which is a very positive fundamental.