DOLLARS AND SEN$E: After a volatile start of the year, what’s next?

BY CHRIS HANLY

Investment Consultant, Gary Goldberg Financial Services

In December 2013, when we first expressed our view that the S&P 500 would likely cross 2,000 in ’14, many thought we were overly optimistic. It turns out, we were too cautious, as the S&P climbed past 2,100 by October of last year. So far, 2015 has been volatile, just as we expected, so the question now is “What’s Next?”

First, let’s examine where we stand. In spite of terrorist attacks in France and elsewhere, a near complete collapse of the Russian economy and market, a sharp drop in oil prices and our Treasury yields falling to all-time lows, markets are holding up pretty well. While there has been a sharp pickup in volatility, overall stocks are down a mere 4 percent or so from their highs (as measured by the S&P 500). More significantly, while there is still plenty to fret over, corporate earnings are relatively strong – especially if you exclude the energy sector – the European economy is showing signs of life as low oil prices ignite exports from Germany, Holland and France. And, the rest of the world is “hanging in there”. Lastly, and very importantly to our economy, all of the recent will likely cause the Federal Reserve to stay dovish and not hike interest rates much, if at all.

So, as the push and pull of global events continues, and news headlines sound more caution, should investors prepare for a mere pull-back or a steeper market correction?

My answer is: Neither, don’t worry about it, with caveats:

Don’t worry if you’re invested in high-quality dividend paying stocks – especially those that are constantly raising their dividends. Don’t miss-understand me, a 5 percent or so pull-back should always be expected. And given the sharp run up in stocks over the past few years, a 10+ percent correction could be in the cards. However, over the intermediate and long term (which I’m identifying as six to 12 months) these stocks should continue to rise.

The markets will continue to rise based on fundamentals.  Here’s what I’m identifying as fundamentals and “friendly” indicators:

  • Economic activity will continue to rise, likely averaging over 3 percent for the year in the Unites States, and about 3 ¾ percent for the world as a whole.
  • Inflation will remain benign, even as labor markets improve and the US unemployment rate drops to near 5 percent.
  • Earnings will come before interest rate hikes. Certainly, the chatter about the Fed raising rates is likely to increase, but actions won’t change. I predict the Fed will maintain their current interest rate policy the remainder of the year.
  • Market volatility can be your friend. Sell-offs are almost never evenly spread nor universal. In the event of a 10 percent sell-off, seek out oversold areas of the market and take advantage of them.

If you’re like me and are essentially fully invested, then sell some of the weakest / most underperforming names in your portfolio. Important note: Make a clear distinction in your portfolio between the stocks that have been underperforming in general, not those which are likely to fall as the result of a sell-off.

Christopher Hanly is an investment consultant with Gary Goldberg Financial Services in Suffern and can be reached at 845-368-2900 ext. 247 or chris.hanly@garygoldberg.com.