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GROUNDHOG DAY?

In Punxsutawney, PA, a groundhog named Phil either will or will not see his shadow and we’ll either be doomed to repeat the first six weeks of winter again (which haven’t been that bad in Boston at least) or have an early spring. Groundhog Day enthusiasts claim that the climate predictions made by Phil the Groundhog (and his “cousins” across the country) are accurate 75 – 90% of the time. The United States National Climatic Data Center (NCDC), the keeper of all weather statistics for the federal government, stated, “The groundhog has shown no talent for predicting the arrival of spring, especially in recent years.” In recent weeks, there have been plenty of “groundhogs” in the financial markets and in the financial media. For some investors, the fear is that the market’s performance in January 2016 will be repeated over and over again, as in the classic 1993 film Groundhog Day starring Bill Murray and Andie MacDowell. Other investors fear that 1998 will play out all over again, triggered by central bankers’ policy mistakes, volatile currency markets, wave after wave of currency devaluations, and eventually a sovereign default. Another group of Groundhog Day aficionados think that the drop in oil, the rising U.S. dollar, a lack of corporate earnings growth, a manufacturing recession, a hard landing in China, and global central banks “running out of bullets” have returned the global economy to the precipice of another 2008.

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FIVE FORECASTERS: FEW WARNING SIGNS

The Five Forecasters still favor the continuation of the current bull market and no recession. The Five Forecasters, which we first introduced in 2014, are five indicators that, collectively, have historically signaled the increasing fragility of the U.S. economy and a transition to the late stage of the economic cycle and an oncoming recession.

Currently, these indicators are generally sending mid-cycle signals (similar to our cycle clock from Outlook 2016). Three of the five indicators are flashing a warning signal and suggest the cycle may have moved past the midpoint, while two of them are still benign. Here we review these five indicators, which still signal that this bull market may continue and that the latest S&P 500 correction may stop short of a 20% decline.

Bear market declines of 20% or more for stocks are not always accompanied by a recession, although more often than not, that is the case. Accordingly, we believe these indicators can be used to give some advance warning of an impending bear market. The average S&P 500 decline in a bear market historically is about 33%, compared to the 12% peak-to-trough decline from the all-time high on May 21, 2015, through January 20, 2016.

 

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Scenario Planning For Current Market Conditions

In the Outlook for 2016, we highlight some areas where uncertainty or important changes may lead to opportunities as the year progresses, such as interest rates, energy, and emerging markets. For each of these areas, as well as for the volatile market environment as a whole, we share an overview of our playbook for added flexibility in 2016. Running through all of these playbooks are some basic themes:
ƒƒ- Patient doesn’t have to mean passive. Stay with your plan, but there
may still be times when it makes sense to lower a portfolio’s riskiness.
ƒƒ- Protect but don’t panic. Some protection can create flexibility.
– ƒƒPursue opportunities. Flexibility creates room to pursue opportunities.

With this more tactical approach, technical analysis can be a more important tool for gauging market behavior and can be useful both to help mitigate risks and take advantage of opportunities. Technicals have always been part of our process in analyzing market behavior. In more volatile markets, where fear can create sustained gaps between what’s going on in the markets and what’s going on in the economy and corporate America, the ability to measure market sentiment through technicals can become even more important.

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Can Winning the Lottery Make you Happy?

In case you missed it, here is Michael’s radio interview regarding the recent Powerball Jackpot. What will happen to the lucky winner of the life-changing prize? Have past winners had their lives changed for the better? Michael gives his expertise below.

 

 

CHINA: A ROCKY START TO A NEW (OLD) YEAR

Once again, the precipitous decline in the value of the Chinese stock market has spilled over to the broader global financial markets. The value of the  Shanghai Index declined almost 15% since the beginning of the year, or at least the beginning of our year. China’s social and economic life is geared around the lunar New Year, which will be celebrated on February 8, 2016. The New Year makes a big difference in China, both psychologically and in real economic activity. Workers in China have seven days off and many travel home to visit family. In one week, years of migration from rural areas to cities is reversed, at least temporarily.

Investors are revisiting issues last considered in August — primarily, the connection between China’s stock market and economy and the broader implications for the global economy. Our basic views on China remain consistent. China’s short-lived stock market bubble burst, but there is little connection between the market and the economy. China is undergoing a painful, but necessary, rebalancing of its economy away from strong government-led infrastructure and manufacturing-based development and toward a more consumer-led and service-based activity. We believe that China’s government still has the resources to smooth this transition. However, new risks are appearing. Many of China’s recent problems appear to be self-inflicted, caused by poorly designed or communicated government policies. China has taken steps to liberalize aspects of its financial markets without the intended result. We will detail some of these new policies and factors and how they may impact China, in addition to the rest of the world.

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CAPEX CONUNDRUM

A number of key U.S. and global economic reports are due out this week (January 4 – 8, 2016), as investors return from the holiday break and refocus on many of the same issues that bedeviled the market in 2015, including the price of oil and the signal it is sending about the health of the global economy. As markets look ahead to the start of fourth quarter 2015 earnings reporting season, which won’t kick into high gear until late January 2016, the price of oil and its impact on business capital spending and manufacturing remain as key concerns.

The reports out this week on the manufacturing sector include:

  1. Markit Purchasing Managers’ Index (PMI) for manufacturing for December 2015, which was released as this commentary was being published
  2. Institute of Supply Management’s (ISM) Report on Business Manufacturing Index for December 2015, which was also released as this commentary was being published
  3. November 2015 factory shipments and orders report
  4. December 2015 employment report, and specifically the job count in the manufacturing sector

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Potential Surprises for 2016

Our analysis of 2016 “surprises” discusses lower-probability, but high-impact events that may unfold over the course of 2016. While no one can predict the future, the surest way to build a surprise-resistant investment plan is to take the time to consider all potential outcomes. Thinking through all possibilities, even those that may not be the most probable, can help investors understand how different scenarios may play out, and allow them to see the warning signs that may indicate a shift is ahead. With this in mind, we explore potential surprises that could impact markets in 2016…

The long anticipated sustained rise in interest rates has failed to materialize over the past several years. Is 2016 the year? Market-based estimates of future interest rates are low, but a pickup in inflation, better economic data, or both could easily lift those expectations and bond yields along with them….

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No Pain, No Gain: 2016 May Require Tolerance For Volatility

This week’s commentary features content from LPL Research’s Outlook 2016: Embrace the Routine. Gains in 2016 may require tolerance for volatility. Stocks historically have offered a tradeoff of higher return for higher risk, the gain of more upside than high-quality bonds versus the pain of market volatility and losses. For the last few years, U.S. stock markets provided below-average pain, while still providing strong returns. Between October 2011 and July 2015, the S&P 500 Index went nearly four years without a “correction” of more than 10%, while climbing an average of 20% a year. Although we expect average returns for stocks in 2016, the path to reach them will be anything but routine. LPL Research expects stocks to produce mid-singledigit returns for the S&P 500, consistent with historical mid-to-late economic cycle performance, driven by mid- to high-single-digit earnings and a largely stable price-to-earnings ratio (PE). This return to a more normal market may mean more volatility, challenging investors’ ability to stay focused on their goals.

HOW IS 2016 SHAPING UP?

In 2016, we expect the macroeconomic environment to be molded by a midto-late cycle U.S. economy, modest inflation, and the start of a Federal Reserve (Fed) rate hike campaign. If the U.S. does not enter recession in a given year, the probability of an S&P 500 gain is 82%, based on historical data from 1950 to present. Heading into 2016, there have been scant signs of excesses in the U.S…

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2016 Outlook, “Embrace The Routine”

When you think of a routine, what is the first thing that comes to mind? Some may think, it’s the mundane, the small steps and processes you follow to accomplish all your tasks for the day. But routine is more than that. It’s about forming good habits, feeling prepared. And perhaps the best part of a routine is the comfort that comes from knowing what to expect. For investors, the definition of a good routine would be knowing what to expect from the markets.

Is there such thing as a routine year for markets? Over the last 50 years, the S&P 500 Index grew at an average of about 10% a year, but its return was between 0% and 20% in any single year less than half the time. We haven’t witnessed a price return of 6 – 11%, a range that might be considered typical for markets, since 1992, over 20 years. And even when there was a year in the routine 10 – 20% range, there were other things going on in the markets that made the year feel anything but routine. Yields may have been extraordinarily low, or extraordinarily high. Commodities were booming, or collapsing. There really is no such thing as a routine year for markets. However, your financial advisor and LPL Research’s Outlook 2016 can help you prepare for what we may see in the year ahead.

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Does Black Friday Still Matter?

The day after Thanksgiving, also known as Black Friday, seems to receive more media hype each year, as it is the unofficial kick off of the holiday season. Markets also pay attention, as Black Friday has historically been an early indicator of consumer demand during the important holiday shopping season. But Black Friday sales estimates have fallen for the past two years, leading to the question, is the weekend after Thanksgiving as impactful as it was in the past? And, should investors be worried?

The Black Friday weekend has been a draw for consumers since the 1950s, but media coverage has picked up steam in recent years, with people braving cold weather, long lines, and short tempers to find the best deals. Contrary to popular headlines discussing the frenzied madness, sales estimates for the Black Friday weekend have actually decreased over the past couple of years. Does this mean that Black Friday shopping is becoming less relevant for consumers?

One driver of lower Black Friday sales relative to history is the wider usage of internet retailers. Online sales have increased over the past decade, so much so that they earned their own discount day — Cyber Monday. This term was originally coined in 2005 when everyone returned to work the Monday after Thanksgiving. Corporate networks used to have much higher speeds than the typical home, and employees still in the Black Friday mindset would go into work and do their holiday shopping online. With broadband internet access widely available now, online sales are no longer dependent on Cyber Monday, though the propensity for online retailers to offer special deals on the day means it continues to be relevant.

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