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Financial Midyear Outlook from LPL Financial Research

Posted by Bank Mutual on Aug 10, 2016 05:00:00 AM

Topic: ALL

LPL Financial Research podium

From Bank Mutual's broker/dealer, LPL Financial, which is the nation's largest independent broker/dealer:

A VOTE OF CONFIDENCE

During any presidential election, you can expect a barrage of promises from the yard sign endorsements, bumper stickers, stump speeches, and media headlines. All pledge to improve the economy, provide better education for all, and preserve the environment. This year has repeated that routine, and certainly hasn’t lacked in drama. Oftentimes, when the big issues of the campaign are revealed — with the slogans, speeches, and promises leading the conversation — an unbiased source can help sort out rhetoric from reality.

A noisy year so far in financial markets has felt like a series of fiery stump speeches. In our Outlook 2016 publication, we proposed that we should all “embrace the routine.” Our forecasts called for what may be considered routine year-end results for the U.S. economy, stocks, and bonds in 2016. However, an important caveat was included: How we get there may be anything but routine.

Our emotions were tested at the start of 2016 — and again in late June. The S&P 500 had its worst start to a year ever, with a 10.5% decline in just 28 trading days, and more 1% daily moves up and down in the first two months of the year than we have seen since 2009. Investor sentiment polls showed the same small number of bulls as was seen near the March 2009 lows, and it seemed as though almost everyone was on recession watch. Yet, by mid-June, the S&P 500 was within 3% of its all-time high, had gone 50 days without a 1% drop, and had gained for three consecutive months.

After that bounce back, however, we faced new opposition in the form of an unlikely candidate. On June 23, 2016, the United Kingdom (U.K.) surprised everyone by voting to leave the European Union (EU). In the two days following the outcome — otherwise known as Brexit — the S&P 500 dropped by 5.3% to 2% below where it started the year. Following that two-day drop, however, the S&P 500 showed its resiliency and within two weeks it was actually above its pre-Brexit levels and up over 4% for the year. Much like the start of the year, we expect the remainder of the year to be similar — with the market remaining resilient and potentially posting gains by the end of 2016.

LPL Research proposes a vote of confidence: in the economy, the market, and most importantly, in our ability as investors to remain focused on our long-term goals. This is not always easy. We may be entering the eighth year of this economic recovery and bull market, but that doesn’t mean the memories of the Great Recession have faded away; and the volatility we’ve seen this year revives those memories and takes an emotional toll.

A vote of confidence means having the belief that someone or something has the ability to succeed. It is more than being positive or negative, a bull or a bear. It is about trusting our assessments of the opportunities — and risks — that may lie ahead, formulating a solid investment plan, and sticking with it through the ups and downs we may face in the coming months and beyond.

Looking ahead to the rest of 2016, we maintain confidence in our existing forecasts, with some minor adjustments. We also expect periods of volatility throughout the rest of this year. The choppiness of the market may deliver pullbacks and comebacks in these final months, but we do not expect to enter a bear market or economic recession. Through this steady, although slow, economic growth, here are some of the key influential factors we’ll be watching for:

  • Federal Reserve (Fed) rate hikes. In part due to the political and economic uncertainty created by the Brexit vote, we have reduced our forecast for Fed interest rate hikes in 2016 from two to one, with additional rate increases next year. Should financial conditions tighten more than we expect, the Fed could remain on the sidelines all year.

  • International opportunities. We remain cautious in our global outlook, but continue to look for opportunities, especially in emerging markets. 

  • Corporate America investments. A pickup in economic growth and an energy sector turnaround may boost companies’ investments in their future growth, an element that has been lacking recently.

  • Second half turnarounds: oil, dollar, earnings. These three turnaround stories are key for the rest of 2016. Despite heightened political uncertainty in Europe, we expect continued stabilization in oil prices and the U.S. dollar, both of which have been an earnings drag in the past several quarters. Should these drags ease, we expect an earnings rebound may occur in the second half of the year.

This has been a volatile year thus far, leaving some to question the continued strength for the second longest bull market in history. As we cast our ballots, our vote is that the current economic recovery and bull market may continue through 2016 and beyond. With the LPL Research Midyear Outlook 2016: A Vote of Confidence, you will be armed with the investment insights and market guidance for what may lie ahead for the rest of this year.

Read the entire Financial Outlook here