Investment Opportunities in 2016: A Tough Row to Hoe
Regions 2016 Investment Outlook
By Alan McKnight, Chief Investment Officer for Regions Wealth Management
As we examine the investment landscape for 2016 and beyond, we are confronted with the fact that returns on investments will be hard to generate and risk will be lurking on the horizon. In such an environment, we believe the markets will unfortunately behave more like 2015 than 2014.
In the equity markets, a number of factors cause us to be relatively cautious. These factors include:
- Domestic equities (S&P 500) having only experienced two other periods (1949-1956 and 1990-2000) since 1928 with longer bull markets – currently 82 months;
- Domestic equity valuations being in the “fair value” range at approximately 16X forward earnings and almost 24X on a cyclically adjusted basis (Shiller P/E); and
- Emerging market equities continuing to struggle, despite lower overall valuations, due to lower growth expectations, as well as concerns related to high levels of U.S. dollar denominated debt that must be serviced with depreciating currencies.
On the fixed income front, markets look equally challenging. Domestic fixed income markets are in the early innings of an interest rate tightening cycle as the Federal Reserve attempts to “normalize” interest rates. This will likely minimize returns and the possibility of generating anything close to what is required by most income-oriented investors. In addition, domestic high yield spreads are at levels not seen since 2010, but with a continued fear of greater defaults due to a slowing global economy and falling commodity prices, one has to wonder if spreads are attractive enough to fully compensate investors for the additional risk.
With limited notable investment opportunities on the horizon, we continue to look for opportunities in global markets. While there will certainly be a host of challenges and heightened volatility on the horizon, we are also confident that it will also present investment opportunities in the coming year.
The Path Forward
Over the long term, investors must reset expectations to embrace the new normal of lower returns on investments and the higher volatility associated with it. So as an investor, how do you bridge the gap between what is required and what is possible?
- Embrace diversification to improve your outcomes, maintain discipline, and mitigate risk
- Be more nimble in your tactical decisions to capture opportunities as they become available
- Focus on what you can control with regard to goals and costs
On a more holistic basis, this focus should cause investors to:
- Review their risk tolerance and ensure that it matches their strategic portfolio positioning
- Analyze their long term goals and objectives and define what is now required to achieve those goals
- Consider what changes may be needed such as:
- Longer timeframe for goal achievement; and/or
- Higher savings rates or capital additions
In sum, it may be a tough row to hoe and investors will continue to be in for a bumpy ride over the coming year and beyond. The markets will require fortitude and patience, so having the right investment strategy in place is critical.
