The weakness in equity markets we ended last year with continued into the first trading day of 2016. China’s manufacturing numbers were ratcheted down again. The Chinese government made some confusing (they may be confused!) moves, and the foreign markets hit on the brakes to kick off early 2016 trading. What is intriguing is that our manufacturing numbers were weaker, too. Finally, to add to this very New Year’s “brew” is the tension, in the Middle East, between Iran and Saudi Arabia. This, so far, has not even been enough to lift oil prices above $40/barrel—even with worries about interference with potential supplies.
As we assess the landscape in 2016, we are looking at global GDP sluggishness that has been becoming apparent since early 2014. China’s downward spiral is a catalyst as it is the new “straw” that stirs the global economic “drink”. While many feel that attractive valuations are to be found in developed areas such as Europe and Japan, they are feeling, in the short term, some of the “rain” from the overhanging “cloud” of China’s slow down. This, in confluence with weak commodity prices, has many foreign economic outlooks to be shrouded at this point. However, if the dollar resumes its uptrend, this will bode well for exports of countries like Germany, which had a good year last year. The U.S. economy continues to be the world’s bright spot with most—but not all—indicators in the green.
As we move to the domestic stocks, picture the leading sectors in the U.S.; the past few months of leading sectors have been Technologies, Consumer Discretionary, and Consumer Staples. Financials look like a good niche that can benefit from the recent Federal Reserve’s hike. Industrials, Materials, and Energy have been laggards the last several months. Moreover, they look to continue this trend into Q1 of this year. One trend we have been following is that domestically Small and Mid Cap stocks have been relatively weak since the correction in August/September 2015. In fact, going back to October 1st of last year, they have been flat to slightly down with Large Caps up 3% over that same time. In finishing, for continued robust strength in the overall market, we hope to see leadership from these smaller and mid-size firms that would more indicate institutional risk taking. The fact that they have lagged in a stronger dollar environment has been enigmatic, though each institution has its own investment philosophy. Some analysts believe—given the volatility last year—that investors have flocked to larger names for stability. It will be intriguing to see if this trend continues into 2016.