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2016 Stock Picks and the 2016 Stock Market Outlook

Years into a strong bull market, stocks are poised for more growth but also more volatility.  During this year of adjustment, the market may move less as a cohesive whole as sectors and stocks go off in their own directions—in the same way a robust U.S. economy is decoupling from stagnation in Europe and slowing growth in China. Your returns will depend on selecting the right stocks in the right markets, rather than relying on a broad-based approach that has worked well until now..

The U.S. Federal Reserve increased interest-rates slightly in late 2015 while other central
banks are searching for ways to stimulate the economies of their respective countries.
U.S. stocks are expected to continue to outperform broad international benchmarks.
On the fixed income side, higher-quality bonds should continue to perform well. Riskier
assets, such as emerging market bonds, may underperform as investors demand higher
yields to offset risks.

In 2016, we forecast another year of gains for global stocks. Supporting factors are revenue from slightly stronger global economic growth, boosted by central bank stimulus, along with supportive fiscal policy. Global growth could also get a boost from the recent decline in oil prices. The gains for stocks may be accompanied by volatility stemming from a number of risks including those posed by central bank actions that are complicated by varying levels of growth around the world. Other risks include flare-ups in geopolitical hot spots and the potential for natural disasters, pandemics, or other uncertain events to tip sluggish global growth into a recession.

Many factors influence the relative performance of U.S. and international stocks. One indicator that has a solid track record of signaling when international stocks may outperform U.S. stocks is the “current account”. The U.S. current account has flattened after steady improvement in recent years and could be near a change of direction.

There are several reasons that we expect developed international stocks to lag behind the U.S. and emerging markets. The key drivers indicate weaker economies, slower application of stimulus in Europe, and valuations that don’t account for the risks – in addition to the trend in the current account. The rapid drop in oil prices may act as a significant short-term boost to global economic growth.

Fiscal policy may be more significant than monetary policy in 2016. Globally, we are starting to see a shift from fiscal drag to fiscal stimulus. These policies are likely to continue to push asset prices higher around the world in 2016 despite still-sluggish global growth.

Emerging Market (EM) stocks are attractive now for a number of reasons. EM stocks may be at a turning point due to attractive valuations. These stocks are relatively inexpensive when compared to stocks in the United States and other developed markets. In addition, EM stocks may benefit from an improvement in global growth. Lastly, we may have reached a turning point for EM stocks. We have seen solid stock market gains from even the most economically challenged EM countries.

EM stocks can perform well even amid a rising dollar for a few key reasons. First, there are now far more commodity consumers than producers among emerging market stocks. In addition, the China-driven commodity boom that coincided with strong EM performance is ending, and finally, lessons have been learned and put into practice since the dollar-driven disasters of the 1990’s. The effect of a rising dollar on any non-dollar investment can act as a drag, but low valuation accounts for much of the risk and leaves plenty of room for solid performance.

The current view is that the current bull market is secular, not cyclical. This does not mean this market is immune to corrections, but it shares characteristics of past secular bull markets. Unique in this recovery is the large spread between the average quarterly real growth of gross domestic product (GDP) and that for the private sector. We believe this spread is set to narrow, with the overall growth rate catching up to the private sector’s growth rate, due to the waning fiscal drag.

Consumer spending is increasing and should remain relatively healthy and could even accelerate more than economic growth. Economic expansion appears to be in a phase of sustained higher capital expenditures.

Every bull market has stages and we are likely in a more mature phase. Earnings growth is outpacing the rise in valuations. Investor sentiment is a shorter-term factor that will likely drive the market’s ups and downs in 2016.

Interest rate uncertainty as the Fed moves toward an initial rate increase could be a catalyst for volatility. Lower oil prices benefit consumers and many businesses. Lower energy prices also hold down overall inflation - a plus for both the U.S. economy and stock market. Lower inflation has historically meant higher equity valuations. A strong dollar means lower commodity prices, which is good for consumption-oriented economies like the United States. The tightening effect of a stronger dollar can be offset by a decline in longer-term interest rates. The bond market has so far helped to offset the negative implications of a stronger dollar. Back to Stock Pick Service

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