Omar Aguilar, the chief investment officer of equities at Charles Schwab Investment Management, the asset management arm of Charles Schwab Corp., says the stock market has historically rallied after presidential elections, regardless of the winning party. Overall, though, “We’re not going to have a big gangbuster year,” he says. He expects single-digit returns for the S&P 500, assuming there will be a fairly stable U.S. economy and a low probability of inflation.
“I think what worries me the most is the emerging markets recovery,” Aguilar says. China will do what it takes to stabilize its economy and markets, he says, “and that obviously will create some headwinds for the rest of the world.”
Aguilar expects financial companies to benefit from a slight increase in the federal funds rate. He expects the technology and consumer discretionary sectors, particularly automakers, to fare well this year given the continued economic recovery coupled with rising consumer confidence and full employment. Although he anticipates more election-driven volatility for health-care stocks, his long-term outlook for the sector is strong because the global population is growing and people in developed economies are living longer.
Rob Sharps, a portfolio manager for the T. Rowe Price U.S. Large-Cap Growth Equity Strategy, which has $36 billion in assets under management, thinks we can still have another few years of this bull market following its recent mid-cycle pause. “We had to absorb that energy-patch weakness that also bled into other industrial areas of the economy,” he says, “and we had to absorb that dollar strength.”
His outlook for 2016 includes GDP growth of 2.5% to 3.5%, a resumption of profit growth in the mid- to upper-single digits, a modest multiple expansion as people gain confidence, and a return of approximately 10% by the S&P 500—plus a little bit of dividend return. It will be difficult for energy or other commodity-oriented sectors to contribute, Sharps says, “absent that sort of coordinated, global, booming economic growth.” Instead, he favors the financial, health-care, technology and consumer discretionary sectors.
Sharps thinks returns will be driven by continued merger and acquisition activity, as well as by innovation. Moreover, “You have this really strange
dynamic right now where the lack of global growth and the lack of profit growth has accelerated the ability of disruptive business models—companies like Amazon and Netflix—to go after more traditional business models,” he says.
His largest position is Amazon, which he’s held in the portfolio for 10 years. “I like the fact that they’re dominant in e-commerce, where I think they continue to have a long runway,” he says. He also likes Amazon’s fast-growing cloud computing business. In health-care, Sharps sees opportunities in biotechnology and HMO companies.
Stronger Doubts
Longtime bull Jim Paulsen, chief investment strategist at Wells Capital Management, predicts a “flattish” year for the U.S. equity market. “It can’t keep going up the way it’s been going up,” he says, citing relatively high valuations, a likely rise in interest rates and an aging earnings cycle.
He’s also concerned by “a shift in market mathematics,” he says, as the U.S. approaches full employment—an unemployment rate of 5% or less. Since 1948, annualized stock returns have been nearly twice as strong when unemployment exceeded 5% than when it was 5% or below, Paulsen says, while long-term government bond returns were almost four times greater. Additionally, stocks and bonds have tended to suffer more frequent monthly declines in fully employed economies, he says.
But the negative effects of full employment on the financial markets could be dampened by accelerating productivity. “I don’t know if it’s super likely, but I think we’re going to get some pickup,” says Paulsen. He notes that this has been the worst productivity of any postwar recovery. Rising productivity would stave off price increases and inflation, and could be, as in the 1990s, “a key to the bull market kingdom,” he says.
He says he’d still be overweight in stocks, given the current risks associated with bonds and the nonexistent returns on cash. But he’d have minimal exposure to U.S. stocks and favor different developed and emerging markets. Other countries are still doing quantitative easing, they aren’t at full employment or as far along in their economic recoveries, and they also have more room for earnings growth because their profit margins aren’t as high, he says.
He’d move toward the producer and capital goods sectors—materials, energy, industrials and technology—because he expects producer prices to rise faster than consumer prices. He also likes commodities. “I think commodities are going to bounce a little over the next year,” he says.
Given his outlook for a small pickup in inflation, Paulsen would be overweight in mid- and small-cap companies rather than large caps because, he says, “They run with leaner, meaner margins.” He also notes that the Russell 2000, unlike the S&P 500, is quite a way from its record highs.
So there you have it. Although there are no crystal balls for the New Year, at least no one expects a wrecking ball to smash stock prices.