Académique Documents
Professionnel Documents
Culture Documents
L a n e A s s e t M a n age m e n t
2015 Review and 2016 Fearless Forecast
from 2014, but a strong increase from 2012 and 2013. Another factor sup-
The story for 2015 was largely written by the U.S. Federal Reserve as it wavered
on increasing the Fed funds rate and eventually did so in December. It seems
Inflation The Core PCE Index (excluding food and energy), is the Feds
to me that, as much as anything, the factors that influenced the Feds thinking
primary focus. An annualized increase of about 1.3% in 2015 was well be-
and the expectations of investors as they interpreted Fed moves (or lack
low the Feds target of 2% and, as such, provided little incentive to increase
thereof), were the primary drivers for both equity and investment grade corpo-
rate (IGC) bond performance in the U.S. Here are some of those factors:
U.S. unemployment The most watched unemployment rate fell from 5.7%
in January to 5% today, a level last seen in March 2008. Surely, a positive moti-
months ago. In the last 5 years, Chinas GDP growth rate has fallen from
vation for the Fed to raise its policy rate, but not enough by itself as the
nearly 12% to about 7%. I believe slow global growth was a primary factor
that delayed the rate hike in 2015 and will continue to influence the Fed
The net result for the S&P 500 was an increase of 1.23% while IGC bonds actually slid 1.26%. Eurozone equities slid
1.64% while emerging markets, heavily influenced by the fallen demand for oil and
other commodities, fell 16.17%. Oil (using
the ETF for oil, DBO) sank over 42% in
2015 after having fallen over 40% in 2014.
Gold sank over 10%.
One perspective would suggest that 2015
was a year of consolidation after having 3
very strong years. Another would suggest
that we have entered a new normal reflecting lower global growth for years to
come. Thats my belief.
My forecast for 2016 follows.
The charts on the following pages use mostly exchange-traded funds (ETFs) rather than market indexes since indexes cannot be invested in directly nor do they reflect the total return
that comes from reinvested dividends. The ETFs are chosen to be as close as possible to the performance of the indexes while representing a realistic investment opportunity. Prospectuses for these ETFs can be found with an internet search on their symbol. Past performance is no guarantee of future results.
Page 2
L a n e A s s e t M a n age m e n t
2015 Review and 2016 Fearless Forecast
2015 PREDICTIONS HOW THEY FARED
Predictions in black; 2015 results in blue italics.
U.S. Equities
ETF ended the year down about 4.8%. I also greatly overestimated the results for
As I believe the primary drivers of stock market returns in 2015 will be corpo-
China and India (Ill speak more about these later). On the other hand, commodity
rate earnings and modest, if any, movement on the federal funds rate, my ex-
producing regions lived up to expectations with a serious shortfall as energy and the
pectation for the S&P 500 for 2015 is for a total return of 8-10% (measured by
The 10-year Treasury yield surprised everyone in 2014, especially after its rapid
increase in 2013. The yield currently rests at about 2% and I believe it will end
the year near 2.5%. Total return for 7-15 year U.S. government bond funds in
While I overestimated the total return for the S&P 500 in 2015 by quite a lot (the
2014 was a bit over 9% while investment grade corporate (IGC) bonds funds re-
actual return was about 1.2%), I was right that the risk was to the downside on ac-
turned a bit over 8%. For 2015, I expect total return for IGC bonds between 6%
count of international considerations (see below). As for the sector calls, healthcare,
and 8%, still better than current yield. I believe the best opportunities for in-
technology and consumer discretionary all out performed the S&P 500 by about
come investing will come from preferred stocks, REITs and established, long
6.2%, 5.5%, and 9.9%, respectively. On the other hand, small caps stocks underper-
formed with a decline of 4.5%. The rebound in energy never occurred as the energy
ETF dropped over 20%.
Despite the long anticipation for a Fed rate hike and the eventual move, the 10-year
Treasury yield increased only marginally during 2015 from about 2.17% to 2.27% re-
As expected, it looks like corporate earnings were a key driver of equity perform-
flecting, I believe, the downward pressure from international government bond yields.
ance in 2015 as earnings have become likely to turn out to be negative for the year
IGC bonds actually lost ground in 2015 with a decline in total return of nearly 1.3%.
for the broad index. However, if energy is excluded, earnings growth is looking to
A point that was driven home for me this year was the negative correlation between
exceed 5%, a much healthier outcome. I was also directionally correct on the Fed
the 10-year Treasury yield and the performance of IGC bonds (more on this later).
funds rate hike with the smallest possible hike at the latest possible moment.
As expected, both REITs and preferred stocks both outperformed bonds, especially
International Equities
Vanguard All-world (ex U.S.) fund,VEU, is 2-3% less than SPY which, given the
above estimate, is 5-8% for VEU. I believe the international equity returns will
be very region specific with India and China leading the way and commodityproducing regions lagging. Europe is a wild card as the broader economy
struggles while the ECB may come to the rescue. Id keep an eye on Germany
** *** **
Every year is a learning experience and 2015 was no different. Three key messages from this past year were the importance of central bank policy here and
abroad, the lingering effects of the Great Recession, and the impact of China on
global growth.
L a n e A s s e t M a n age m e n t
Page 3
tor, they may be as high as 5% not stellar, but consistent with my starting
point for 2016. A broader look at corporate profits is provided by the Bureau
of Economic Analysis (BEA). Close examination shows theres been virtually
no growth in corporate profits since 2011. While the forecast for 2016 is
brighter than the outcome for 2015 owing to less negative impact from
energy the energy sector will continue to weigh down aggregate results.
Headwinds will come from a strong dollar that will depress income and prof-
Long term performance While the 20 and 35-year total return for the
S&P 500 has hovered around 10%, the total return for the last 8 years has
been about 6.3%, including the weak return for 2015. With expectations for
Monetary Policy The U.S. Federal Reserve finally took an initial step in rais-
U.S. and global GDP growth in 2016 to be about half the long term rate of
ing the Fed funds rate in December with a promise to be slow and measured
growth (2.4% vs. 4.6%) and a very high correlation between long term GDP
when it comes to future increases. In effect, the policy rate is expected to re-
growth and the S&P total return, something on the order of 5% may be a
better starting point for an estimate of the S&P 500 total return for 2016.
The inflation rate remains well below the Fed target of 2% (about 1.3% in the
a whole (that is, including energy), the forecast is for the 4th quarter of 2015
sure from wages or commodities, I dont see inflation as causing a Fed move
to mark the first time since 2009 that there were 3 consecutive quarters of
Although the unemployment rate is now at 5.0%, its lowest rate since 2007,
earnings for the full year could turn out negative, excluding the energy sec-
the Fed has backed off its focus on the absolute value as a trigger to its tim-
L a n e A s s e t M a n age m e n t
Page 4
In terms of the expected Fed funds rate increase, my view is that an additional 50-75 basis points might be added in 2016, with risk to the downside
keeping in mind that 2016 is an election year. As expected last year, the Fed
prepared the market well for the eventual rate increase and suffered no
damage because of it. I expect a similar degree of communication this year.
L a n e A s s e t M a n age m e n t
Page 5
Industrial Production Despite the approximate 30% share of U.S. GDP attributable to manufacturing, there is a strong correlation between the U.S.
industrial production index (IPI) and the S&P 500, as shown on this next
chart. The observation to be made here is that both the IPI and the S&P
500 have been relatively flat since late 2014. Although I dont know for sure,
I suspect that the IPI has been flattened by the reduction in energy-related
construction brought about by the sharp decline in the price of oil. If we observe any additional deterioration in the IPI, that would not bode well for
the broad S&P 500 index.
with a lower outcome by year-end more likely. If Im right, this will be a tailwind for U.S. consumers but a headwind construction spending and emerging markets.
Oil And speaking of oil, its not at all clear to me where the price is headed
in the near-term. This next chart is for Brent, the global price benchmark
for Atlantic basin crude oil. Although the chart is hard to read, the point to
note is that its only in the last 10 years that oils per barrel price exceeded
$40. With low inflation, slowing global economic growth, Iranian oil likely
coming on-line, Saudi Arabia keeping supply levels high, and an end to U.S.
oil export prohibition, I am not expecting much in the way of price recovery
L a n e A s s e t M a n age m e n t
Page 6
Analyst estimates According to a survey of 10 prominent analysts by Barrons taken December 12th, the average expected increase for the S&P 500
index for 2016 amount to 6.8% taking dividends into account (Ive ignored
the 2+% gain that the index increased in December after the predictions
were made since Im assuming the predictions were made as if there was no
change in the remaining part of 2015 otherwise, while I could be wrong,
their predictions would call for a 4.8% return for 2016 which I doubt was the
intention).
Market breadth One measure of market strength is a growing or persistently high percentage of individual stocks that are above their 200-day
moving average (DMA). Over the last 10 years, there has been a positive
correlation between the performance of the S&P 500 and the number of
stocks within the index that are above their 200 DMA that is, until recently.
As the next chart shows, sudden reductions in the percent of stocks above
their 200 DMA have generally been followed by rapid recoveries as in the
period from 2004-2007 and 2009-2013. On the other hand, a more persistent reduction as in the period from 2007-2009 seemed to portend the
significant market correction which came about as the percentage continued to deteriorate. The interpretation here is that the market continued to
advance on the strength of fewer and fewer large cap stocks until a certain
reality took hold bringing the entire market down.
Bearing in mind that this is only one example in the last 16 years and that
there is absolutely no guarantee that past performance will be repeated,
this pattern seems to have begun again in 2014 (or a little earlier, depending
on your perspective) so far without a corresponding correction. But this
divergence cannot last. Eventually, either the percentage of stocks under
their 200 DMA needs to improve or the broader market needs to adapt to a
new reality. While I dont believe the market is primed for a major correction, it is something we need to watch carefully.
Recession Watch According to an early December article in Fortune, JPMorgan predicted a 76% chance of a recession in the next 3 years with a 25%
chance within the next 12 months. Citibank increased the ante by placing
the probability at 65% for 2016. And, if you do a Google search, you will find
JPMorgan and Citi are not alone in expressing concerns.
On the other hand, the New York Fed places the probability of a recession at
virtually zero using the highly respected yield curve as a predictor of recessions (see next page). Note in the bottom chart that the nominal (not inflation-adjusted) yield curve is no less steep than it was a year ago and the real
(inflation-adjusted) curve is actually a bit more steep, i.e., suggesting a recession is less likely.
Do I think a recession is likely? Id have to say no on the basis of the steady, if
slow, recovery underway since 2008. But, with a consensus for global growth
in 2016 around 2.4%, it wouldnt take much of a slippage to raise the potential for a recession. It is for this reason that it is important for investors to
remain alert and flexible, with a game plan in mind should events turn ugly.
L a n e A s s e t M a n age m e n t
Page 7
** *** **
International Equities
The international economic situation is complex and very region and country
specific.
For the Eurozone, GDP growth of about 1.5% translated into a small decline
for EMU equities in 2015. For 2016, the outlook is for only a small improvement. Dollar strength along with accommodative policy from the ECB and
growing capacity utilization will help to keep Europe out of recession despite
L a n e A s s e t M a n age m e n t
Page 8
being dogged with high unemployment (twice the level of the U.S.).
cial and economic headwinds. With 2016 GDP growth expected to continue
Japan emerged from recession in the second quarter of 2015 but continues
Since the beginning of 2011, Latin American region equities and the rate of
ing from reduced demand for exports to China. One positive factor that
sets Japan apart is the willingness to take fiscal measures to support the
and Chile and, since 2013, including Mexico and Peru. The reasons are com-
economy (not relying entirely on monetary policy) although its not clear
plex and include both economic factors (declining commodities) and politics.
whether policy will be strong enough. Meanwhile, for all its troubles, Japan
In light of the current global economic slowdown which has been taking a toll
had one of the best equity performance outcomes in 2015, pulled forward
on oil, copper, precious metals and other commodities, not to mention politi-
by its financial sector. For 2016, the outlook is for GDP growth in the 1%
2015 and the Toronto Stock Exchange slipping about 9%. A recovery in Can-
I expected a stronger return from India equities in 2015 than what we actu-
ada, like a recovery for other commodity producers, will depend upon im-
ally experienced (the Bombay stock exchange declined over 5% for the
proved global demand and a recovery of some type in the price of oil. I am
year). The culprit seems to be exports that fell to their lowest level in 5
** *** **
L a n e A s s e t M a n age m e n t
Page 9
2016 PREDICTIONS
While theres been a lot of focus on the Federal funds rate lately, and under-
So, if you are still with me, here are my predictions for 2016. They apply to mar-
standably so, the 10-year government bond rate in the U.S. and in other major
ket conditions that are evident today. Paraphrasing Keynes famous comment, if
developed markets deserves similar attention as this rate has considerable in-
fluence on the economy and investments. A very high rate snuffs out borrow-
U.S. Equities
ing and can draw investor funds from equities to bonds while a very low rate
motivates investors to seek higher returns, drawing investor funds out of
bonds and into equities, taking on increased risk in the process. With the current U.S. 10-year Treasury bond yielding 2.27% just 10 basis points above
With the slowdown in global growth and weakness in U.S. profits, Im expecting
another year like the one we had in 2015 with the S&P 500 advancing 3-5% with
risk to the downside.
where 2015 began its in the very low rate environment that we find our-
selves today.
sumer discretionary and regional banks to outperform the S&P 500. But heres
While the U.S. 10-year yield is not far from its historic low point of 1.5%, it is
important to note that it is considerably higher than comparable bond yields
in the Eurozone, U.K., Japan, and Canada, and roughly the same as in China,
South Korea and Australia. Interestingly, the comparable bond yield in India is
an outlier at about 7.75%.
As the U.S. rate barely budged following the Feds December rate hike nor for
the year as a whole, the relationship with comparable rates in other developed
economies illustrates the demand for the strength and safety of the U.S. dollar
(up about 8% in 2015). I expect the same pressures will continue in 2016 with
only a modest change for the year.
** *** **
Summary
While, on balance, Im expecting equity and bond performance in 2016 to be
very similar to 2015, as discussed in preceding paragraphs, there are some
hints that equities could be in store for a significant correction. Beyond those
technical considerations, geopolitics and terrorist activities have the world on
edge. The U.S. presidential election adds uncertainty. Investors should review
their risk tolerance and be prepared for volatility and market disruption.
L a n e A s s e t M a n age m e n t
Page 10
bonds to be very close to zero consistent with a small increase in the 10-year
Treasury bond yield. As with 2015, I believe the best opportunities for income
investing will come from preferred stocks, especially in the financial sector, and
REITs. Heres how representative ETFs performed in 2015 and keeping in mind
benefit investments in developed economies that are hedged against the dollar.
If the S&P 500 meets my goal for 3-5%, I believe it will continue to reflect the
The hedged regions that I believe will outperform the broad (unhedged) index
in 2016 are Japan, Germany, and the Eurozone. Heres how ETFs representing
in 2015. Therefore, Ive dropped them from my outperform list for 2016.
these three areas (unhedged and hedged) performed in 2015 compared to the
broad international index,VEU. Again , past performance does not guarantee
future results.
** *** **
Bonds and Other Income Securities:
The 10-year Treasury yield surprised everyone again in 2015 with very little up-
returns have moved into a new, lower trajectory on account of the slowdown in
ward movement. I expect the same in 2016 despite a few Fed funds rate hikes
global growth caused in part by Chinas slowdown, but also by the unwillingness
and believe it will end the year near 2.5%. Total return for 7-15 year U.S. gov-
of developed nations, including the U.S., to make the necessary fiscal interven-
ernment bond funds in 2015 was about 1.4% while investment grade corporate
(IGC) bonds funds declined about 1.3%. For 2016, I expect total return for IGC
L a n e A s s e t M a n age m e n t
Page 11
SPY is an exchange-traded fund designed to match the experience of the S&P 500 index adjusted for dividend reinvestment. Its prospectus can be found online. Past performance is no
L a n e A s s e t M a n age m e n t
Page 12
SPY is an exchange-traded fund designed to match the experience of the S&P 500 index adjusted for dividend reinvestment. Its prospectus can be found online. Past performance is no
guarantee of future results.
L a n e A s s e t M a n age m e n t
Page 13
Portfolio Protection
Reflecting the concerns of most investors, this analysis chart has been prepared to assist in making a decision about
protecting against a major market sell-off such as occurred in 2000 and 2008. The chart shows the weekly value of
SPY (the ETF proxy for the S&P 500 index on a total return basis) for the last 3 years. The red line is a 50-week exponential moving average (50EMA) and the green line is a 25-week exponential moving average (25EMA). When
the weekly price has fallen below the 50EMA, the 25EMA has crossed below the 50EMA, and the slope of the 50EMA
has turned negative. these three critical criteria would be an important signal to me that it would be timely to reduce equity exposure, perhaps significantly so depending on the current state of the economy and market valuation. This has happened only twice in the last 20 years,
though it has come close on 3 other occasions, including last Fall. While its true there can be false or short-lived signals, taking steps to protect assets at
the wrong moment is, I believe, a small price to pay, especially since we dont know how wrong the moment is at the time it occurs.
We are now at a stage of indecision by the market. Both the 25EMA and the 50EMA trend lines are essentially flat while the momentum indicator
(MACD) is also leveling. Price remains above the trend lines for now, but is volatile and lacks conviction. While none of the critical criteria are violated at
the moment, the current pattern presents a warning that should not be overlooked.
L a n e A s s e t M a n age m e n t
Page 14
VEU is an exchange-traded fund designed to match the experience of the FTSE All-world (ex U.S.) Index. Its prospectus can be found online. As of 11/30/14, VEU was allocated as follows:
approximately 19% Emerging Markets, 46% Europe, 28% Pacific and about 7% Canada. Past performance is no guarantee of future results.
L a n e A s s e t M a n age m e n t
Page 15
SPY and VEU are exchange-traded funds designed to match the experience of the S&P 500, (with dividends) and the FTSE All-world (ex US) index, respectively. Their prospectuses can be
found online. Past performance is no guarantee of future results.
L a n e A s s e t M a n age m e n t
Page 16
Income Investing
Investment grade corporate bonds, represented below by LQD, began the year strongly as the yield on
the 10-year Treasury slipped, but eventually were overtaken by the recovery of the 10-year yield as it began to respond to the increased likelihood of the Fed funds rate increase. At this stage, we have a virtually flat channel of performance with weakened trend in the last two months along with a loss of momentum.
One lesson I learned in 2015 after projecting a strong return for LQD at the same time as an increasing 10-year Treasury yield was that the correlation between the two is strongly negative. LQD had a total return in 2015 of negative1.3%, nearly 5% less than its current yield of about
3.5%. With an expectation of a slowly rising 10-year Treasury yield, it would be completely consistent to expect a very small total return for
LQD, if not a negative return in 2016.
LQD is an ETF designed to match the experience of the iBoxx Investment Grade Corporate Bond Index. Prospectuses can be found online. Past performance is no guarantee of
future results.
L a n e A s s e t M a n age m e n t
Page 17
SPY and LQD are exchange-traded funds designed to match the experience of the S&P 500, (with dividends) and the iBoxx Investment Grade Corporate Bond Index, respectively. Their
prospectuses can be found online. Past performance is no guarantee of future results.
L a n e A s s e t M a n age m e n t
Page 18
Income Investing
In this chart, we have the relative performance of the S&P U.S. Preferred Stock Index ETF (PFF) to investment grade corporate bonds showing relative strength of preferred stocks.
While investment grade corporate bonds have been inversely related to the 10-year Treasury yield, the same
has not been true to preferred stocks, especially those of financial institutions, or REITs. In fact, as shown below, there is a generally positive correlation between the yield on the 10-year Treasury bond and the relative
performance of preferred stocks to investment grade corporate bonds, probably driven more by the search for yield more than
the change in the Treasury yield. With the expectation of a slowly rising 10-year Treasury yield, and the improving trend and momentum of the
relative performance with bonds, I believe preferred stocks offer an excellent alternative income-oriented investment.
PFF seeks to track the investment results of the S&P U.S. Preferred Stock Index (TM) which measures the performance of a select group of preferred stocks . LQD is an ETF designed to
match the experience of the iBoxx Investment Grade Corporate Bond Index. Prospectuses can be found online. Past performance is no guarantee of future results.
L a n e A s s e t M a n age m e n t
Page 19
U.S. Dollar
This chart shows the relationship of the U.S. dollar (USD) to a basket of developed-economy currencies (the Euro (nearly
60% of the weighting),Yen, British Pound, Canadian Dollar, Swiss Franc and Swedish Krona). Against those currencies, the
USD gained strength in 2014 and 2015, and is now more than half way from the 35-year low established in 2008 to the last
high point reached in 2001-2002.
The strength of the dollar has major implications for U.S. and foreign exports, a headwind for the former and a tailwind for
the latter. While there are multiple factors that affect dollar strength, high on the list is the divergence of U.S. Fed policy (tightening, if slowly)
while policy from the other major central banks are all either standing pat or increasingly accommodative. My expectation is that the dollar
will continue to gain strength, but that the pace will moderate as it has done this year.
Page 20
L an e A ss et M an ag em ent
Disclosures
Edward Lane is a CERTIFIED FINANCIAL PLANNER. Lane Asset Management is a Registered Investment Advisor with the States of NY, CT and
NJ. Advisory services are only offered to clients or prospective clients
where Lane Asset Management and its representatives are properly licensed or exempted. No advice may be rendered by Lane Asset Management unless a client service agreement is in place.
and related exchanged-traded and closed-end funds are selected based on his opinion
as to their usefulness in providing the viewer a comprehensive summary of market
conditions for the featured period. Chart annotations arent predictive of any future
market action rather they only demonstrate the authors opinion as to a range of possibilities going forward. All material presented herein is believed to be reliable but its
accuracy cannot be guaranteed. The information contained herein (including historical
prices or values) has been obtained from sources that Lane Asset Management (LAM)
considers to be reliable; however, LAM makes no representation as to, or accepts any
responsibility or liability for, the accuracy or completeness of the information con-
tained herein or any decision made or action taken by you or any third party in reli-
tional and emerging markets may entail additional risks such as currency
ance upon the data. Some results are derived using historical estimations from available
data. Investment recommendations may change without notice and readers are urged
to check with tax advisors before making any investment decisions. Opinions ex-
Small-cap stocks may be subject to higher degree of risk than more es-
pressed in these reports may change without prior notice. This memorandum is based
this report may be unsuitable for investors depending on their specific investment ob-
jectives and financial position. The price or value of the investments to which this re-
action may exist. The prospectus contains this and other information. A
port relates, either directly or indirectly, may fall or rise against the interest of inves-
tors. All prices and yields contained in this report are subject to change without notice.
sectors.
Please let me know if there is one of interest to you. As always, I appreciate your feed-
back and look forward to addressing any questions you may have. You can find me at :
their cash flow needs for the next 3-5 years are secure with a margin
for error. Beyond that, the degree of risk taken in a portfolio should be
commensurate with ones overall risk tolerance and financial objectives.
www.LaneAssetManagement.com
Edward.Lane@LaneAssetManagement.com
Edward Lane, CFP
The charts and comments are only the authors view of market activity
Kingston, NY
Reprints and quotations are encouraged with attribution.