we can say is thank goodness 2015 has come to close! 2015 was supposed to
be a typical pre-election year with a solid advance in the S&P500 just as
it has been every other pre-election year all the way back to 1939, the
last time it was negative. During that time frame the United States was
getting drawn into WWII. Even 1987, the year of “Black Friday” the market
turned in a higher return than 2015. With a return just north of 1% in the
S&P 500, this has turned out to be one of the worst pre-election years.
Typically those who control the White House have staged the market for
solid returns with policy that induces economic expansion so their party
can stay in power.
In difficult years like 2015, there is usually a rainbow that shines and
shows us solid returns in our diversification strategy. Asset Allocation
strategists like ourselves diversify so that when one area is weak, there
is usually an area to be thankful for. According to Bianco Research, LLC
and Bloomberg there has not been one year since 1995 where at least one
asset class did not return 10% or more. Further, over the last 90 years,
there were only 4 years where returns were under 4%. 2015 happens to break
the track record since 1995. It did not matter what you invested in:
Stocks, bonds, foreign developed, emerging markets, commodities, real
estate. They all turned in boring returns at best and, in the case of
commodities and Emerging Markets, returns were sharply negative. Real
Estate was the top performer in 2015 at 2.5%.
Enough of 2015, what roads will be paved in 2016? What is going to give us
a smoother ride? The answer is not so simple. The groundwork has been laid
by the Fed clearing the way for higher rates. Historically when the Fed
begins a tightening campaign as the first chart shows below, the road gets
a little bumpy and then smooths out later. 2016 may be no different. Rates
have been set higher and thus we might see the volatility associated with
this move only to have a much smoother road by the second half of 2016.
Our outlook for 2016 is much like our past outlook for 2015: Muted
Returns. As you might recall we were only expecting an approximately 6%
The 2nd chart below shows how foreign markets have historically behaved.
Clearly, the world markets fair much worse than the United States. We
maintain this is simply based on the relative economic strength of the
United States. The US economy is usually doing well when rates are hiked
by the Fed. This is the case this time as well. The rate hike was
predicated on a recovery of the US economy for the previous 18 months.
Most rate hikes are not because inflation is out of control. Why the rate
hike then? Especially since the economy at this point has improved, but is
looking a little long in the tooth in terms of improving. The Fed is
looking to give itself some wiggle room if they need to drop rates later
as to add some powder in the keg for later.
Let’s look at another chart showing how the commodities generally fare
after the first rate hike. As we have seen in 2015, the market has had a
tough time convincing the consumer they are saving money with the fall in
oil prices and prices at the pump. The amount of capital expenditures in
the oil sector has fallen like a rock off the shelf. If commodities turn
around and more capital goes into the sector or we can just stop the
bleeding, we may see not only oil and commodities rise, but the markets
may rise in tandem with the commodities.
To ascertain how 2016 will perform, let’s look at the main earnings growth
drivers, or lack thereof, for 2015. In 2015, we saw margin expansion of
near 0.8%, share repurchases of 2.2% (corporations had excess cash and
some issued low cost debt to buy their own stock), but we saw revenue
decline mainly due to the increase in the US Dollar. This negatively
impacts those corporations doing a majority of their business overseas.
The increase in the dollar not only impacts revenues but ultimately
impacts earnings as well. Another main driver of negative earnings (EPS)
in 2015 was the decline in Oil and Commodities (also partly due to the
increase in the Dollar). See the JP Morgan charts below how oil impacted
earnings and how it will likely assist in pulling the market back out of
the earnings slump we saw in 2015.
Oil and the US Dollar were to stay unchanged this would help the
year-over-year percentage change in revenues. If the Dollar stays even for
2016, we could see revenue increase up to 4%. However, we think it will be
more like 2%. The same with earnings growth, we expect earnings growth of
3-5% since it will not have to fight the US Dollar as it did in 2015.
These factors with ongoing share repurchases similar to 2015 and no margin
expansion should make way for an increased market by 5-7%. We believe
these catalysts will keep the markets in positive territory. Again, as
mentioned in previous outlooks, the amount of cash available to return to
shareholders has grown and the supply/demand of stock continues to decline
due to stock buybacks by companies in the S&P 500. Albeit, this is not
organic growth in earnings, it is still growth as less shares and the same
earnings equates to higher earnings per share.
With potentially added volatility in 2016 from the Fed raising rates,
muted earnings and sales growth, a possible slowing manufacturing, why
would the markets turn in a positive performance in 2016? Currently, the
Forward P/E ratio is 16 which is close to the average of 15.8 since 1990.
With growth of GDP in the US between 1-2%, and interest rates at all-time
lows, this Price to Earnings ratio appears appropriate. Therefore, we
think the market is currently fairly valued and if earnings rise near 5-7%
from a combination of share repurchases and earnings growth, we think the
market (S&P 500) will perform in the same range.
The Archer Team
Troy C. Patton, CPA/ABV
Steven C. Demas
John W. Rosebrough, CFA
The opinions contained herein are not intended to be investment advice or
a solicitation to buy or sell any securities. Archer Investment
Corporation manages The Archer Funds. You should carefully consider the
investment objectives, potential risks, management fees, and charges and
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and other information about the Fund, and should be read carefully before
investing. You may obtain a current copy of the Fund’s prospectus by
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www.thearcherfunds.com. Past performance is
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