January 2016 Monthly Outlook: Economic and Stock Market Commentary

by on Feb 18, 2016 Categories: monthly outlook

Economic Commentary:
One of the most recent emerging trends that bears watching is the drop in the Manufacturing ISM reading,
which fell below 50 in November. Any reading below 50 indicates the manufacturing sector is contracting.
This contraction is due to the strong dollar making US goods more expensive in international markets.
Luckily, manufacturing is a small cog in the US economy, therefore a manufacturing recession alone is not
enough to tip the entire US economy back into a recession. The Non-Manufacturing ISM registered 55.9 in
November, 3.2 points lower than the October reading of 59.1. This represents continued growth in the
non-manufacturing sector at a slower rate.

For the first time in about ten years, the Federal Reserve raised interest rates from 0% to 0.25%. The
Federal Reserve is expected to raise rates 2-4 times in 2016 signifying a significant shift in monetary policy.
The core CPI index in the last 12 months has crept above the Federal Reserve’s 2% target to 2.1%. Due to
continued low oil and energy prices, the overall inflation level has stayed low. The unemployment rate held steady at 5%.

The Leading Economic Indicators increased 0.4% in November to 124.6. The U.S. LEI registered another
increase in November, with building permits, the interest rate spread, and stock prices driving the
improvement,” said Ataman Ozyildirim, Director of Business Cycles and Growth Research at The
Conference Board. “Although the six-month growth rate of the LEI has moderated, the economic outlook for
the final quarter of the year and into the new year remains positive.”

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.

Stock and Bond Market Commentary:

In the investment world, 2015 will be known as the year that no asset class performed well. The S&P 500
index finished the year on a down note, dropping 1.72% in December. This is the first time the S&P 500 has
experienced a losing month to close out the year since 2008. When dividends are accounted for, the index’s
total return was 1.26%. Interest rates increased slightly in December causing bonds to decline by 0.19%. For
the year, bonds squeaked out a return of 0.48%. Real estate finished the year by increasing 1.11% in
December. Similar to stocks and bonds, its main return came from dividends which allowed the total return
for 2015 to be 1.64%. Small cap stocks lost 5.03% in December and finished the year down 4.45%.

The strongest performing US sector in 2015 was consumer discretionary stocks which returned 9.92%. This
was due to strong employment and low gas prices allowing consumers to have more discretionary funds to
spend on dining out and leisure travel. The worst performing sector was energy as it lost 10.5% in December
alone, causing a 21.47% loss for 2015. The price per barrel of oil fell further in December and finished the
month under $37. Continued rising supply and sluggish demand caused the energy sector to crater in 2015.

The US stock market is in the very late stages of a long bull market, and technical research shows that a
bear market is eminent, and has potentially already begun. It is prudent to continue the shift toward more
defensive investments such as bonds and consumer staples to reduce portfolio fluctuations and protect
investments during these volatile times in the market.

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