February 2016 Monthly Outlook: Economic and Stock Market Commentary
As feared, the first estimate of Q4 US GDP showed the economy slowed, registering a 0.7% growth rate
from the 2.1% Q3 rate. This slowdown has primarily been due to lower manufacturing activity. The decline
in manufacturing has been due to the dollar’s increased value relative to other currencies, making US
goods more expensive in international markets. The Non-Manufacturing ISM registered 55.3 in December,
0.4 points lower than November. This represents continued growth, although at a slower rate, in the
“The U.S. LEI fell slightly in December, led by a drop in housing permits and weak new orders in
manufacturing,” said Ataman Ozyildirim, Director of Business Cycles and Growth Research at The
Conference Board. “However, the index continues to suggest moderate growth in the near-term despite the
economy losing some momentum at the end of 2015. While the LEI’s growth rate has been on the decline, it’s
too early to interpret this as a substantial rise in the risk of recession.”
Indicators point to the US economy being in the late stages of a long business up-cycle without major
excesses that brought down some prior economic upturns. With core inflation meeting the Federal Reserve’s
inflation target, the Federal Reserve has ended their unprecedented zero interest policy and has shifted to a
less accommodative monetary policy. Signs point to the US economy remaining stable and experiencing
moderate growth in 2016.
Stock and Bond Market Commentary:
2016 started off terribly for the stock market as the market index dropped over 10% in the first two weeks of
the year, then rebounded to finish the month down 4.98%. All S&P sectors except consumer staples and
Utilities lost ground in January with Materials and Financials being hit the hardest.
Small Cap stocks indexes continued their significant underperformance relative to Large Caps. This trend
should be expected to continue as Small Caps are considered more risky than Large Cap stocks in a
downward trending market. The weak economic data caused investors to shift from risk assets to safe havens like Bonds with the
Aggregate Bond Index increasing 1.24% in January as the 10-year rate dropped 34 basis points to 1.93%.
The US stock market is in the very late stages of a long bull market. Technical research is showing that a
bear market is eminent, and we are possibly in the early stages of a bear market already. At this time, it is
prudent to shift to more defensive investments such as Bonds and Consumer Staples. With technical
indicators predicting the bear market, Meridian managed portfolios were reallocated (where appropriate)
toward more defensive, safer investments at the end of 2015.