Over the past three weeks I have been trying to separate what is noise from the business media and what is reality. I am preparing for my investment club’s annual shareholders’ meeting. Facing a room full of financial advisors can be nerve racking. They expect my experience in option trading to produce positive returns regardless of market direction. My 2015 results will not disappoint them.
However, I found investment trends in 2015 to be very obvious but 2016 is going to be much more difficult. Last week I posted that world economic growth in 2016 is going to suck. World growth estimates came down on Thursday from 3.5% to 2.9%. Fourth quarter GDP growth estimates for the United States have been reduced to a range of 0% to 1.2%. Trying to find companies that can grow their revenue and profits in a slow growth environment will be challenging.
Why my 2016 crystal ball is cloudy
- Most experts were wrong with their predictions on the price of oil in 2015. Their current prediction is for low oil prices for the first half of 2016 and a rebound to the $50.00 range later in the year. If they are wrong again, many oil producers will default on their high yield debt, leading to bankruptcies that could cause panic in the stock markets.
- The Federal Reserve has been communicating 4 interest rate hikes but Wall Street experts believe that only 1 or 2 hikes will actually happen. If they are wrong, the U.S. dollar will increase in value causing lower profits for U.S. multi-national corporations. Plus higher interest rates will reduce share buybacks which isn’t very positive for stocks prices.
- China is struggling to manage their economy. Economic growth in China, the second largest economy, is questionable at best. China buys Brent crude oil which usually trades higher than WTI. The price spread has been narrowing confirming weak oil demand and slower economic growth. (Brent $33.34, WTI $32.92)
- A stock is considered to be in a bear market when it trades 20% or more below its 52 week high. More than half the stocks within the S&P 500 are in a bear market. Current price to earnings ratios are high in comparison to lower profit growth.
- No Santa Claus rally and January started with five straight down days in spite of a positive jobs report. (Scary)
- The Canadian stock market is down 20% from its Sept 2014 high which is already in bear market territory. Many fund managers believe that a rebound in oil could cause the Canadian market to outperform the U.S. One young fund manager recently stated that his energy fund is 100% invested in the oil patch. (Foolish?)
Here is a small portion of what I am going to say at our shareholders meeting
I took some profits leading up to the Dec 16, Fed meeting and also did some tax lost selling. Our current portfolio contains 55% cash, 5% in Canadian stocks and 40% in U.S. stocks. I expect market volatility to increase during 2016 making option trading more profitable. It will also make buying put options for downward protection more expensive.
The three biggest unknowns are the future price of oil, the number of interest rate hikes by the Fed and GDP growth in the U.S. and China. I believe that the Canadian stock market is pricing in a recession in Canada. If crude oil doesn’t rebound in the second half of 2016, the Canadian dollar could fall further and we should consider moving more of our Canada cash to U.S. dollars. I will also ask them for their views on the current market turmoil and for some of their recommendations to clients.
Stay tuned for my next post which will hopefully have some investment ideas.
I am very sure that the roller coaster ride that started in 2015 will continue in 2016.