Tough Times Ahead for 2016
Current Market Analysis
Last Month's Results
Trends To Watch
What I'm Thinking
News and Notes
Current Market Analysis
[Please read the News and Notes
section for an important announcement about the future of this
Last week was the worst opening week of a year in
the history of the stock market. The S&P 500 dropped 6.0%. The
Dow Jones Industrial Average fell 6.2% and has entered "correction"
mode as it is now down more than 10% from the last peak. Even worse,
the Nasdaq Composite swooned 7.3% and the Russell 200 plunged 7.9%. The
Russell index is now down 19.3% from the peak, which is perilously
close to bear market territory. As of the close of business Friday,
the Dow Jones Industrial Average stood at 16,346, which is down 919
points, or 5.3%, from when I wrote to
you last month. No matter how you slice it, things
don't look good, and the bad start foreshadows tough times ahead for
the full year. I do think that the majority of this sell off can be
attributed to the losses in China rather than anything specific about
our domestic economy or stock market. Therefore, I think that this too
Looking at the chart of the #DJIA you can see that
a key support level above 17,000 was violated by the sell off
last week. The next crucial support is the green line just below
15,750. That is the bottom from the August correction. Technically,
it's important that the index holds above 16,000.
The weakness in Transportation
Index really did presage the troubles that would eventually envelope
the rest of the stock market. I should have listened to that more
closely. I kept expecting things to get better, but they never did.
After trading in a tight range for five months, late last year through
the first quarter of this year, the index basically headed inexorably
lower, breaking through one support level after another. Most recently
it fell right through support around 7,500 before hitting a key level
around 7,000. We must all pay more attention to the transports. When
this begins to move higher, I think that will signal a real
The Dow Jones Utility
Average has spent most of the past year churning in a range
between 610 and 540. The current price of the index is just above both
moving averages and an interim support level of 570. Assuming that the
Fed makes good on its intent to raise rates this year, the index could
come under more pressure. Although I don't think the Fed will move as
aggressively as expected (see my predictions below) I do think this
will be a year to be underweight utilities.
For the past eight months the yield on the 10-year
treasury bond has remained between 2.0% and 2.5%. Interestingly, after
all of the ups and downs, the yield was essentially unchanged for the
year. Looking ahead, I expect the yield to stay relatively stable at
least for the next six months.
Late selling in December brought the year to a
painful close, setting the stage for the drubbing we're dealing with
right now. While the S&P showed a very modest full year gain,
the truth is that the greatest gains were concentrated in very few
stocks, like Alphabet, Netflix, Facebook and Amazon.com. The vast bulk
of the rest of the stocks in the index went nowhere, or more likely,
experienced significant declines. Government bonds were essentially
flat for the year. Junk bonds lost 4.5%, but even that was better than
the 7.5% drop in small-cap value stocks. Overall, growth trumped value
in 2015. I think that may be reversed in 2016.
Name of Index
Dow Jones Industrial Average
Large-cap tech stocks
Russell 1000 Growth
Large-cap growth stocks
Russell 1000 Value
Large-cap value stocks
Russell 2000 Growth
Small-cap growth stocks
Russell 2000 Value
Small-cap value stocks
Europe, Australia, Far East
US government bonds
Barclays High Yield
High-yield corporate bonds
* Return numbers
include the reinvestment of dividends
According to the Department of Labor, the
figure for seasonally-adjusted initial jobless claims for the week
ended January 2 was 277,000, 10,000 less than the prior
week, and about 5,000 less than the prior month's figure.
The four-week average of 275,750 was 5,000 higher
than the tally from a month ago. The tally of jobless claims has held relatively
stable for most of the year. About 2.23 million
people continue to collect unemployment insurance, about 100,000 less
than last month.
solid, if unspectacular results in November, the non-farm payroll
employment report in December blew away expectations as
292,000 jobs were gained in the month, while revisions added back
50,000 jobs to the October and November totals. The household survey
reported that the unemployment rate held steady for a third straight
month at 5.0% while the labor force participation rate ticked up for
the second month to 62.6. Average hourly wages for blue collar workers
inched up to a new high of $21.22 while the average work week again
remained at 33.7 hours.
7.9 million workers were still being counted as
unemployed and 2.0 million people still remained unemployed longer
than 27 weeks. The seasonally
adjusted number of people who could only find part-time work rose to
6.2 million while the number of marginally attached workers
rose to 1.8 million. The number of people holding multiple jobs
jumped to 7.86 million. All of this conspired to leave the
comprehensive U-6 "underemployment" rate at 9.9%. This relatively
good report was lost in a sea of bad news about China. And the concern
is that the news will get worse in the coming months.
Congressional Budget Office (CBO) estimated that on a net present value
basis, the Treasury reported a budget deficit of $11 billion in
December, about $13 billion less than the small surplus recorded
in the same period last year. This leaves the three month deficit at
$212 billion, $36 billion more than last year.
The National Association of Homebuilders/Wells Fargo Confidence
Index fell one point to 61 in December, the second drop in a row. "For
the past seven months, builder confidence levels have averaged in the
low 60s, which is in line with a gradual, consistent recovery," said
NAHB Chief Economist David Crowe. "With job creation, economic growth
and growing household formations, we anticipate the housing market to
continue to pick up traction as we head into 2016."
The Census Bureau reported that privately owned housing starts
were 10.5% higher in November, recovering from a 12% drop in October,
rising to an adjusted annual rate of 1,173,000 units, which was 16.5%
higher than a year ago. New building permits
rose 11.0% from the prior month and were 91.5% higher than the
year before. This all bodes well for the future of the housing market.
The Census Bureau reported that on a seasonally adjusted annualized
basis 490,000 new homes were sold in November, up
4.3% from October, and 9.1% from a year ago. The estimate of the
number of homes for sale was 232,000, representing 5.7 months of
inventory at the
current rate of sales. The median sales price was $305,000, up almost
$20,000 from last month, leaving it above the 12-month moving average
price of $295,758. There's nothing wrong with those numbers.
The National Association of Realtors reported that on a seasonally
adjusted annualized basis, only 4.76 million existing homes
were sold in November, a whopping decline of 560,000, or
10.5%, from October. It was also the smallest number of the year, and
3.8% lower than a year ago. The estimate of homes for
sale is 2.11 million, which represents 5.1 months of inventory
at the current rate of sales. The average selling price
was $220,300, off the high levels recorded in June and
slightly above the rising 12-month average of $218,658. This is a
markedly different picture than the one in new home sales.
According to the Institute for Supply Management (ISM), economic
activity in the manufacturing sector contracted in December for the
second straight month, falling to 48.2. This marked six
consecutive monthly drops. The ISM index of non-manufacturing activity
also slowed, falling to 55.3, which still signaled growth in the
service sector for 71 consecutive months. None of this suggests
anything but a very sluggish economy and is the strongest reason for
why wage growth is stagnant.
Conference Board reported that its index of Leading Economic
Indicators (LEI) increased 0.4% in November, following a solid increase
of 0.6% in October. "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
According to the "third" estimate by the Bureau of Economic Analysis,
GDP increased at an annual rate of 2.0% in Q3 2015, down
slightly from 2.1% in the second estimate, but down sharply
from the 3.9% rate reported in Q2. This was still better than the
decrease of 0.2% in Q1, but below the 2.2% increase in Q4 2014.
And it remains well below the 5.0% and 4.6% growth rates in Q3 and
Q2 2014, respectively. This is not robust growth by any measure, but
it's better than the rest of the developed world. And I expect that it
will remain near this level for much of 2016.
According to the BLS, the seasonally adjusted Consumer Price Index
for all Urban Consumers (CPI-U) remained unchanged in November,
after increasing 0.2% last month. If you strip out food and energy, CPI
rose 0.2%. Since February the CPI has moved in a tight range
between -0.2% and 0.2%. This is another example of the lack of
inflation in our economy.
The Conference Board's Consumer Confidence Index increased to 96.5 in
December. "Consumer confidence improved in December, following a
moderate decrease in November," said Lynn Franco, Director of Economic
Indicators at The Conference Board. "As 2015 draws to a close,
consumers’ assessment of the current state of the economy remains
positive, particularly their assessment of the job market. Looking
ahead to 2016, consumers are expecting little change in both business
conditions and the labor market. Expectations regarding their financial
outlook are mixed, but the optimists continue to outweigh the
pessimists." I bet that optimism has faded quickly in January.
surging last year to a multi-year high, what will become of the dollar
index this year? Three
times last year the index failed to pierce resistance
around 100 and five times support held around 93.25. The answer to this question will go a long way
towards determining the fate of commodity pricing and the profits of
multi-national corporations. I think we'll see the greenback remain in
a tighter range in the high 90's.
decline in the price of West Texas Crude has been a
catastrophe for energy investors and for people working in, or serving,
the oil industry. As you can see below, things haven't been this bad in
the energy sector since the depths of the financial crisis.
on the rise, layoffs are multiplying and dividends are being slashed.
And as much as it pains me to say it, until we hear about
being slashed around the globe, things are not likely to improve any
time soon. In fact, we could quickly see prices under $30.
shouldn't surprise anyone that the price of gold is finally moving
higher, thanks entirely to the rout in stocks last week. While this
will certainly please the gold bugs, I don't think the gains will be
ultimately sustainable. As a result, I still wouldn't be a buyer. Until
the price can break, and remain, above the falling red trend line, I
don't think we'll see joy for gold investors.
simply isn't anything to say about how horrible this chart is. As I
said all last year, the desultory picture shown here is a neon
trumpeting major troubles in our economy. The strong dollar continues
to hurt the price of copper, as does the slowing rate of economic
growth in China. I'm afraid there is little to warrant any optimism in
the near future for the price of copper. I wonder if the Fed is looking
at this chart.
the tremendous gains enjoyed by the Nasdaq Composite over the
past few years, it's not surprising that during a correction the
tech-heaving index would take losses larger than the broader market.
Indeed last week's plunge wiped out a the entire gains from 2015. But I
wouldn't despair; look for the index to rebound fairly quickly as I
don't think investors are ready to dump growth stocks just yet. It
would help matters if Apple would regain some of its lost luster.
financial sector continues to trade in a fairly tight range and I don't
expect this pattern to change in the next few months. But by the end of
the year I do think this sector will break through resistance and
record a new high.
chart of the housing index does not paint a pretty picture. After
achieving a new record high in August the index moved lower throughout
the remainder of last year before plunging in December and early
January. The price fell right through two interim support levels and is
perilously close to major support around 202. Clearly this sector is
very concerned about the ramifications of further interest rate hikes
by the Fed. So if those increases do not come to pass, we could see a
index for developed international markets looks very sickly. Twice in
the past two months the price has tested support just below 57. If it
holds below this level, things could get ugly. I find little reason to
invest in the developed foreign world as there just is little to no
growth to be had.
going to repeat what I wrote last month as there is little else to say.
I don't trust anything about
the stock markets in China. I'd leave that country to the real
professionals with boots
on the ground over there. For the rest of us, it's probably best to
rallying hard in October and November after forming a double bottom
in late August and September, the NYSE Bullish
sentiment index turned right around and headed back down for a third
attempt to pierce resistance at 30. So if history is any guide at all,
and if this index truly works as a contra-indicator, one should expect
a rally shortly.
price of the volatility index, the VIX, has crept back into
the "fear" zone above 25. Like the bullish sentiment index
above, this suggests that a rally should be forthcoming as this index
is also considered a contra-indicator.
Fearless Forecasts - Looking
Back and Gazing Ahead
year in the
January newsletter I make a number of predictions about the stock
market, the domestic economy and a few key trends. At the same
time, I use this opportunity to review the accuracy, or lack thereof,
of my Fearless Forecasts from the prior year. So first, let's see how
my prognostications from last year panned out. The forecasts are in
black and what really happened is in red.
think the broad markets will again finish higher in 2015,
although not without some greater pain, and with less of a gain. I
think the best case scenario puts the Dow Jones Industrial
Average up 8%, but could be as little as 5-6%. Let's say the year-end
price will be around 18,750. Like last year, I think the S&P
500, with a greater emphasis on tech and growth, will do a little
better, finishing up as much as 10%, for a closing price of
2,200. I expect a tough year getting to those gains. We should have
four or five declines of more than 5%, with one or two of those being
more than 10%. But as last year, buy and hold will be the way to go. Although
I was clearly correct about the pain we would endure, and that the
S&P 500 would outpace the Dow Jones Industrial Average, I
was still too optimistic about the final results for the
market. The Dow fell 2.2% to finish at 17,425, while the S&P
dipped 0.7% (both before the effects of reinvested dividends). We
survived the two months between mid-August and early October when the
market ranged between down 5% and down 10%.
expect that 2015 will be a difficult year for foreign markets. Look for
the developed world, as represented by the MSCI EAFE index to be in
negative territory for the year. I also anticipate that the recent
gains in the Shanghai index will be reversed next year. And at least
one member of the European Union, if not two, will default on a loan. This
proved partly prescient as the EAFE finished down 3.5% for the year
after slumping most of the second half. The gains on the Shanghai index
were indeed reversed, in a spectacular plunge over the summer in which
the index fell 45% before reversing to finish the year 9% higher than
is the year the experts believe the Fed will begin to raise rates, and
the consensus is sometime this summer. I think the Fed will hold off
raising rates longer than anticipated, and once they begin, will raise
less than expected. I believe they won't raise before Q4 at the
earliest, and if they do raise, they won't increase by more than 25
basis points during 2015. The yield on the 10-year Treasury will
remain likely hit a high of 2.25% and could go as low as 1.5%. I
was dead on here as the Fed held off until December before hiking rates
25 basis points. The yield on the 10-year Treasury hit a high of 2.50%
and a low of 1.65%.
dollar index will continue to move higher in 2015. In fact, I think
we could see a gain of about 10%, bringing the index close to 100 for
the first time since 2003, and closer to parity with the falling
prediction was also spot on as the dollar index rose almost exactly
10%, and did briefly surpass 100 before closing at around 99.
happens to the price of West Texas Crude this year will be one
of the biggest stories of 2015. The price has already plunged 50% and
it will likely fall further before hitting bottom. I think it could go
as low as $40, or even briefly to a quick panic sell off of $35. At
point, the energy sector will be the buy of the year, or of multiple
years. It's hard to pick a possible high price, but I'll say
$75. This prediction was unfortunately
correct as oil was indeed an enormous story as the price of "black
gold" fell to a low of $34.75 in December after peaking at just over
$60 in June.
tough to make a call on gold for this year. A stronger dollar and lack
of inflation should hurt the price. But heavy buying by Russia, China
and India, among others, will help prop up the price. In addition,
expected stock market turmoil should increase interest in gold. So I'll
leave the median price around $1,250 with a low of $1,100 and a high of
$1,350. I got this mostly right as the misery in
gold continued for the third year as the price peaked around $1,300 in
January before falling to a low of $1,045 in December. The median price
was around $1,170.
expect the rally in the housing sector to
peter out in 2015. I think the rate of growth in new homes
will slow considerably, to less than 5% at best, or a drop of 5% at
worst. Existing homes will do a little better because they cost less.
The HGX will likely be flat for the year, with the first half
performing better than the second. I
was partly right here. After peaking in February, the number of new
homes sold in November was slightly low than the tally from last
December and the average sales price was roughly flat. The number of
existing homes sold was down 6%, whereas the average sales price was
5.8% higher. The housing index (HGX) peaked in August before falling,
although it still finished almost 5% higher for the year.
think the average rate of GDP growth over the next four quarters will
be between 2.75% and 3.00%. Falling oil prices
will curb growth in the energy sector and a strong dollar will hurt
exports. Concerns about global deflation will also limit GDP growth
overall. I was a little too optimistic
about the rate of GDP growth last year. The average for the past four
quarters was a modest 2.0%. Falling energy prices really put a crimp in
things, as did the soaring dollar.
headline unemployment rate in 2015 could fall as low as 5.4%, and will
likely be no higher than 6%. The U-6 measure for unemployment will
likely range from 11% - 12%. The labor participation rate is unlikely
to move appreciably. Wage growth will continue to be weaker than needed. I
was right in the tenor of this prediction but I was a bit off on the
numbers. The labor force participation rate barely budged, and wage
growth was stagnant for most of the year. After peaking at 5.7%, the
unemployment rate fell to 5% and the U-6 hit a low of 9.8%.
All in all, my forecasts were pretty on target, and if I had been
closer with my prediction for the overall stock market, I would have
had an almost spotless record. And remember, I have no formal
economics. I'm just someone who closely observes what is happening in
the world and tries to apply that knowledge to my investment management
business. Anyway, last year is history now; it's time to look forward,
which means a new set of Fearless Forecasts. So without further ado,
here we go:
believe the broad markets will struggle again in 2016, as
evidenced by its horrible start. I
think the best case scenario puts the Dow Jones Industrial
Average up 4-5%, but it could just as easily fall for the second year
in a row, ending down as much as 10%. So much depends
on the Fed, the economy, the elections, the weather, China and
unexpected events like terror and natural disasters. After finishing
last year at 17,425, I see the #DJIA closing the year at around 16,750.
If that comes to pass, I think the value weighted average will outpace
the tech heavy S&P
500. Watch out for a spike of volatility this year.
think that 2016 will be worse for the developed foreign markets than
for the US, so I would expect their markets to underperform ours by up
to 5%. As for the Shanghai index, I anticipate full year
losses of at least 10%.
is anticipated that the Fed will raise rates four
times this year for a full 1% rate increase. I believe that a weak
global economy, as well as a less than robust domestic economy, will
mean no more than two 25 basis point increases will be announced. As a
result, the yield on the 10-year Treasury will
remain likely range between a high of 2.75% and a low of 1.75%.
dollar index will probably move in a tighter range in 2016. As such, I
expect it to trade between 95 and 101, with the bulk of the time spent
between 98 and 100.
think the price of West Texas Crude will hit bottom in January, falling
as low as $25 a barrel in panic selling before staging a modest
recovery. I don't believe the real price boom will happen until 2017,
limiting the high this year to between $45 and $50 per barrel.
though I'm not ready to start buying gold again, I do believe the price
of gold will end the year higher than it started, thanks to global
unrest. It wouldn't surprise me to see a full year price gain of around
10%. It also wouldn't surprise me to see another year of losses if the
world is less turbulent than I expect. I see the median
price around $1,100 with a low of $1,000 and a high of
expect the housing sector to
hold steady this year. New home sales will suffer more than existing
ones thanks to higher interest rates and higher acquisition costs. The
sector won't fall much though thanks to more Millennials buying homes
for the first time. The HGX will likely trade in a range of up or down
5% for the year.
think the average rate of GDP growth over the next four quarters will
be lower than the Fed would want, ranging only between 1.75% and 2.00%.
Falling oil prices
will destroy growth in the energy sector and a strong dollar will
continue to hurt
exports, as will a weak economy in China. This will be a big story
during the election debates.
headline unemployment rate in 2015 in unlikely to fall much further as
the labor force participation rate simply refuses to change
appreciably. I see the primary unemployment rates going no lower than
4.8 while the U-6 rate bottoms around 9.4%. Wage growth will tick a
little higher, but won't grow much more than 2.5%. Most of the jobs
created will be in the lower paying service sector.
I have to take a stab at the Presidential election. I must admit, I
don't have a strong feeling about it just yet, beyond the fact that if
someone like Trump or Cruz were to win I would want to flee the
country. The truth is that even though I'm a registered Democrat, I'm
not enamored with Hillary either. That being said, I predict Hillary
will defeat Marco Rubio in a tight election as a fractured Republican
party fails to deliver Rubio the votes he needs to beat a unified
What I'm Thinking and
I started Werlinich Asset Management almost 19
years ago, in March of 1997. In that time I've witnessed two historic
bear markets, following the collapse of the tech bubble (2000 - 2002)
and the housing bubble (2008). Both times stocks came roaring back with
massive bull markets. We've also experience numerous periods of modest
corrections and subsequent rallies. Each of these actions are part of
the normal cycles of a healthy stock market. Last year would
appear to have marked the end of the latest and lengthy rally, with
most broad averages ending the year flat to slightly down. It would not
be the worse thing in the world for 2016 to follow a similar pattern.
That would be a far better result than another punishing bear market.
Indeed, if the market does trade basically sideways for two years, that
would release some of the froth resulting from a six year rally to
historic record highs, and allow earnings multiples to fall to more
acceptable levels. It would also set up 2017 for solid gains, which is
also the typical result of the first year of a new election
So if 2016 is likely to result in modest gains or
losses, what is the best game plan? I believe it would be to own a
diversified basket of blue-chip, dividend paying companies with a
reasonable allocation of growth among industry leading companies in
today's leading sectors. Some of you may also want to own bonds which
is fine, although I still don't like bonds at these yields as I believe
the downside outweighs the upside. I still believe today, as I did
almost twenty years ago, that being a patient investor, and taking a
longer-term view (3-5 years is appropriate) is the best way to create,
build and protect your wealth. It sounds trite, but the name of the
game is still to buy low and sell high. If you can consistently do that
over 20, 30, 40 or 50 years, you'll be just fine.
Now that the Fed finally popped its cherry and
raised the short-term lending rate by 25 basis points in December, the
common wisdom is that they will raise rates four times in 2016, each
time by another 25 bp. I take a contrary view. I think they will hike
rates a maximum of twice this year. The economy is simply not strong
enough, nor is it growing fast enough, to justify the danger of more
rate increases. So look for one increase in each half of the year. I
think the Final Four will be Trump, Cruz, Rubio and (in a surprise)
Christie. If nothing else, that fight to the finish will be
entertaining, and more than a little terrifying. As for the Dems, I
think Bernie will eventually accede the crown to Hilary, setting up a
very interesting battle between the two parties in the fall, assuming,
or course, that the Hairpiece does not run as an independent after
being denied the Republican nomination.
Friday I took advantage of the week long rout by spending about
$250,000 in accumulated cash rounding up existing positions in a few
portfolios. All of these investments were made looking out years into
the future. I anticipate most, if not all of those purchases will
produce solid gains within the next year or so. For the rest of my
portfolios, I'm content to sit tight and wait for things to play out.
I'm very comfortable with the vast majority of my current
holdings and I believe my clients are well positioned for whatever the
market will throw at us in 2016. That being said, I remain vigilant to
any significant changes in the market that my precipitate action on my
part to either stem losses or initiate a new position.
published my first newsletter in August of 2003. Since then, I have
written a new letter almost every month for the past twelve years. In
that time we've enjoyed a two massive bull markets and survived one
painful crash. We've experienced Bull and Bear markets and
just about everything in between. Hopefully my newsletters have helped
you become a better investor and make smarter decisions over the past
twelve years, resulting in higher returns. But now, it's time for a
I've given a lot of thought over the past few
months to how long it takes me to write my newsletter, what content is
most important and most timely, and how many people actively read it
each month. I came to the conclusion that it was time to make a change.
Therefore, starting immediately, I will publish "News and
Views" on a quarterly, rather than a monthly basis. This means that my
next issue will be disseminated in April. In the interim, I
will resume blogging. It will be via the blogs that I'll share, in a
much more timely fashion, some of what I'm thinking about the market,
the economy and the political landscape. I will also continue to tweet
virtually every day. So if you are not following my blog, or my twitter
feed, please click on the links at the top of the newsletter and do so.
I hope that this new schedule will satisfy my loyal readers. Please
write to me and let me know what you think.
for me and the family, we're all doing well. Nola is home from college
and enjoying catching up on her sleep. Lily and Ezra are back in school
and heading toward mid-terms. For Lily, the next few months will be all
about waiting to hear from colleges. We're all keeping our fingers
crossed that she gets into the school of her choice. Kathiryn and I are
looking forward to spending some time in warmer weather over the next
that's it for now. I look forward to communicating with all of you via
twitter, my blog and this newsletter throughout the rest of the year.
And let's hope that the next 51 weeks are better than this last
and Views", Copyright, Werlinich Asset Management, LLC and
www.waminvest.com. All Rights Reserved.