Our market outlook for the next 180 days

Four times a year, the team at The Investment Reporter makes some short term predictions. We do a 180-day forecast for the economy looking for sectors that will lead and those that will lag the economy as a whole. We then pick the 25 stocks that we expect to beat our 180-day stock market outlook and 25 stocks that we expect to lag behind over this time.

Most commodities are in a slump–particularly oil and gas, despite a recent rise in the price of oil. This hurts Canada’s economy and its commodity-heavy stock market. Many producers are cancelling or delaying projects and have cut jobs. So far this year, the Canadian stock market is up by 2.87 per cent, as measured by the S&P/TSX Composite index. Our advice to buy during the stock market setback earlier this year has paid off.

Canada’s economic outlook for 2016

In 2016, Canada’s GDP is expected to grow by 1.6 per cent. (GDP, or Gross Domestic Product, is the value of the goods and services produced in a country.) This is according to The Economist. It relies upon multiple forecasts in coming up with its numbers. Warmer weather this year than last year is positive. And there was no shut-down of West Coast ports.

Lower commodity prices and last year’s interest-rate cuts to offset economic weakness, knocked down the Canadian dollar. This and oil’s fall, in particular, is mostly good news for Central Canada. Due to the lower loonie, Canadian exports have become more affordable to foreigners. GDP growth of two per cent in the United States and United Kingdom make them the two fastest-growing economies of the G7 (the Group of Seven industrial countries). As key trading partners, this should raise Canadian exports and put more Canadians back to work. Also, revenue and earnings in American dollars and British pounds sterling turn into more loonies.

At the same time, the lower loonie makes imports more costly. This leads to ‘import substitution’. That is, buyers substitute cheaper domestic products and services (such as travel) for costly imports.

In addition, lower gasoline prices leave a lot more money in the pockets of Canadian drivers. This should lead to higher consumer spending. At the very least, it should assist more over-indebted Canadians to stay afloat. This is positive for the banks.

As we often point out, it’s the direction and magnitude of company earnings that ultimately set stock prices. One thing that will increase reported 2016 earnings is share buybacks. In the first quarter of 2016, the companies of the S&P 500 (the Standard & Poor’s 500-stock index) are expected to have spent US$165 billion repurchasing their shares. On New Year’s Day, non-financial members of the S&P 500 held cash of US$900 billion, according to Bloomberg News. If they can’t invest it profitably, they should return it to the shareholders.

China’s government plans to stimulate its economy through loose fiscal and monetary policies. Its GDP is expected to advance by 6.4 per cent in 2016. Industrial countries in Europe and Asia are net oil importers. While lower oil prices will help them, financial markets could stumble. That’s because huge sovereign wealth funds in the Middle East will have fewer ‘petro-dollars’ to recycle. Massive cash flow from the Middle East kept stock markets buoyant.

One long-term factor than can hurt the U.S. economy is the high U.S. dollar. This reduces exports as American goods become costlier. A high dollar increases cheaper imports. It’s also negative for the earnings of American companies. That’s because sales abroad turn into fewer and fewer U.S. dollars.

With earnings likely to rise in 2016, we’re cautiously optimistic about our 2016 stock market outlook that North American stock prices will rise. Still, there are also several risks that could hurt Canadian stocks. One is that the U.S. central bank is likely to raise interest rates. If so, income investments could fall.

Our market outlook for interest rates was right

Our market outlook for interest rates, however, is that they will increase slowly. In January, we wrote that “62 per cent of Wall Street experts expect another increase in the first quarter. We disagree. Our view is that the Fed [U.S. central bank] will not raise interest rates in the first quarter.” We noted that Fed chair Janet Yellen said that interest rates would rise gradually. We also pointed out that rapidly-climbing interest rates would send up the U.S. dollar. This would damage multinational U.S. companies. The main risk to our view is if unemployment falls below the level at which inflation starts to accelerate.

A second risk for Canadian stocks is a fall in U.S. and overseas stock prices. Last autumn’s stock market setback in North American stocks was precipitated by setbacks elsewhere, particularly in China.

A third risk is that some companies’ sales may stall. While many earned more in recent years, part of these earnings came from cost cutting—not from higher sales. Without a pickup in sales, it’s hard for companies to raise their earnings quickly in a sustainable way.

Unforeseeable geo-political and financial risks also exist. That’s why it pays to diversify, of course.

Risk-free times never materialize

If you wait for a risk-free time to invest, then you’ll always be earning next to nothing in cash instead of putting that cash to work. Should a risk-free time occur, it might be better to sell. After all, when things can’t get better, they can only get worse.

Remember to diversify across the five economic sectors. Also remember to diversify within each economic sector. Within the Utilities sector, for instance, you might buy one telephone company, one electrical or gas company and one pipeline company.

Invest gradually. That way, you can profit from dollar-cost averaging. Keep buying high-quality, dividend-paying stocks for growing cash flow and price gains in the long run.

 

The Investment Reporter, MPL Communications Inc.
133 Richmond St. W., Toronto, On, M5H 3M8, 1-800-804-8846

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