As we near the end of 2015, here is a summary of current capital markets conditions and our 2015-17 outlook/playbook:
- Stocks are more attractive than bonds or cash over the next five years – we continue to overweight stocks versus bonds relative to long term asset allocation targets.
- U.S. equities are close to fair value, and priced to provide average annual returns of 6-9%.
- We prefer U.S. to international equities.
- We prefer growth over value until we enter the next recession – emphasis on technology, health care, and consumer discretionary companies.
- Bonds remain unattractive given historically low nominal and real yields and narrow credit spreads; we prefer credit risk to interest rate risk, but are defensively positioned in bond portfolios.
- Primary risks are: 1) sluggish global economic risk/China slowdown; 2) weak commodity sector; 3) persistently strong dollar (affects earnings for U.S. multi-nationals); 4) rise in terrorism; 5) uncertainty regarding effects of Fed tightening; 6) potential credit problems from low interest rate environment.
- Expect increased capital markets volatility – S&P 500 range of 1700-2400 possible over next 12 months.
- Equities are very undervalued if interest rates remain at or below current levels for an extended period of time.
- Themes: “old v. new”, “U.S. v. ROW”, “aggregate data can be misleading – dig deeper”, “power of brand equity, margins, and cash flow”.