At seven years, this economic recovery will be the fourth-longest on record. It has also been one of the weakest. U.S. Gross Domestic Product growth has been about 2.2 percent compared to normal levels of about 3.5 percent. Investors wonder if the U.S. economy can survive without Federal Reserve-supplied training wheels. The ride will be a bit wobbly, but we are confident.
U.S. consumer strength gives us our confidence. Consumer activity explains about 70 percent of U.S. GDP, and consumers are increasingly employed. The average monthly job gain in 2015 was +225,000, and both the National Federation of Independent Business small business survey and the ManpowerGroup survey of business’ hiring intentions indicate continued strength in hiring in 2016.
Employed consumers are confident. Consumer confidence has been strong despite geopolitical turmoil, El Nino and an interesting domestic political landscape. Household net worth is 20 percent higher today than it was before the Great Recession. Furthermore, people feel good when gas is below $2 per gallon.
Despite this strength, we believe the U.S. Federal Reserve will only very slowly raise rates. We expect two or three increases throughout 2016. Global turmoil is a factor in our outlook.
Our emphasis on high-quality short-to-intermediate corporate and municipal securities worked well in 2015, and we remain on that path. Short maturities will provide comfort when we hit potholes of inflation scares in 2016.
The U.S. stock market is not inexpensive, but the devil is in the details. Market leadership was narrow in 2015 with the “FANGs” (Facebook, Amazon, Netflix and Google) up about 60 percent. The median performance for all S&P 500 stocks was -5.0 percent. According to the AAII Investor Sentiment Survey, only 23.6 percent of individual investors are optimistic. The S&P 500 energy sector is trading at a price-to-book value ratio of about 1.4, which is below its long-term average of about 2.6. Pockets of opportunity such as these are attractive to us.
A cautious approach is warranted. Patient long-term equity investors will be rewarded. The S&P 500 stock market index has registered positive returns in 67 percent of the years since 1928. We like those odds.
-Sara Walker, CFA, is senior vice president and senior portfolio manager at Associated Bank in Milwaukee.
