One Man’s Opinion: Will Equities See Muted Gains In 2016?

ManThe year 2016 is likely to see a slow start, similar to what was witnessed in the last couple of years, due to some additional slowdown in manufacturing, said Mark Vitner, senior economist at Wells Fargo Securities.

The forward looking data on manufacturing is still pointing to additional deceleration – new orders data looks horrible, while the US economy failed to record any growth in industrial production in 2015. A lot of people try to minimize the troubles in the factory-sector arguing manufacturing is a small part of the economy, but it still accounts for the bulk of the swing in GDP from quarter-to-quarter.

While the general-consensus economic growth for 2016 is 2-2.5 percent, Wells Fargo Securities thinks weak manufacturing could be the biggest obstacle to achieving that target, he noted.

Many investors believe 2016 would be a repetition of last year where gains would be muted. With interest rates rising, profit growth is likely to be stuck. While wages are ticking up, it’s hard to raise prices amid falling commodity prices, which is going to hurt margins.

With equities ending the year lower, muted gains in 2016 could actually mean no gains to show for at all and investors could end up with less, said Mark Luschini, chief investment strategist at Janney Montgomery Scott.

The way the market has been bifurcated – the gains were actually led by the so-called FANG-group (Facebook, Amazon, Netflix and Google) of stocks. If investors look at ETFs like MTUM (iShares MSCI USA Momentum Factor ETF) – which is a big momentum ETF, that’s up about nine percent year-to-date.

Actually, there’s a group of stocks that’s doing very well in the market on a total-return basis – which means adding all dividend returns, and may actually end the year with about 2-2.5 percent or so. But if investors look at the rest of the market – something like the Valueline Arithmetic Index which comprises of 1,700 stocks – all equal weighted, that’s down nearly 3-4 percent year-to-date.

Investors are realizing mostly an outcome that’s actually much different from the S&P 500. Janney’s forecast that 2015 gains would be positive, but would be much lower than 2013 or 2014 turned out to be accurate. But even Janney didn’t anticipate the set bifurcation that was witnessed in 2015, he explained.

Asked if instead of being a sequel, 2016 could actually surprise investors with a loss or gain of say, 15 or 20 percent, Mark Luschini said Janney is following the consensus opinion and expecting muted gains in 2016. But markets may broaden somewhat in 2016, which could be the surprise, he concluded.

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About Ulli Niemann

Ulli Niemann is the publisher of "The ETF Bully" and is a Registered Investment Advisor. Learn more
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