In the first quarter of 2016, the rise of the market as represented by the S&P 500 Index, generated a return of 1.4%. The market’s modest rise took place against a background of diminished expectations. During the quarter, the consensus expectation for economic growth for the remainder of 2016 was reduced. Consistent with the revised expectation for economic growth in both the US and overseas, the outlook for profits was revised downward and now includes declines in the first and second quarters of the year.
The revised consensus forecast for economic growth in the US falls in a range of 2.0% to 2.5% for all of 2016. Corporate profits are now forecast to increase at a low single digit rate for the entire year. While the forecasts themselves are not extraordinary, there is a decided lack of conviction accompanying them. The lack of conviction reflects, in part, the uncertain nature of domestic economic policies, and the wide range of possible outcomes for economic growth overseas.
In the US, there has been speculation with respect to the Fed’s actions going forward. For a number of years the Fed has under taken policies that include a zero interest rate environment and quantitative easing in an attempt to stimulate economic growth. Thus far, these policies have not produced the desired results. Economic growth remains well below the long-term average. The Fed changed course slightly when it raised short-term rates once in 2015. Market participants are awaiting the Fed’s next increase in rates and trying to anticipate its impact on economic activity.
The outlook for economic growth overseas is muddled. China appears to have picked all of the low hanging fruit of economic growth. New policies will be needed to drive growth in China. In the EU, economic policies lack coherence. In the rest of the world, political strife seems to be the dominant theme. As long as the strife persists, it will be difficult to fashion the appropriate economic policies. US companies with a large exposure to fluctuations in economic growth overseas may face a difficult environment.
Expectations for the remainder of 2016 include an increase in corporate profits beginning in the third quarter, and below average but steady economic growth in the US throughout the remainder of the year. Inflation is forecast to remain below the Fed’s target of 2%, and the yield curve implies a modest upward drift in interest rates by the end of the year. If this environment materializes as the year progresses, the stock market could show single digit returns for the year as a whole; however 2016 is an election year, and the market is likely to react to events in the political arena in ways that are difficult to foresee.