When it comes to economic growth, 2016 is looking a lot like 2015 — and probably even worse.» Read More
Over the past quarter century, investors have turned to dividend-paying stocks as lifeboats in an ocean of volatility.
However, traders are expecting that to change, and in a pretty monumental way.
Players in the swaps market — generally institutional investors exchanging contracts over expected moves in market variables — are pricing in the lowest growth in dividends since 1950, according to a Goldman Sachs analysis. The current pricing levels imply a growth rate of just 1.3 percent a year, which would be down sharply from the average 5.8 percent growth in the 65-year period.
If the expectations are correct, it would mark a major change for retail investment strategy.
"Strategically, we are partial to dividends, which have historically generated a meaningful share of total return for US equities," Goldman strategists said in a note to clients. "However, on a tactical basis, rising interest rates pose a risk to high dividend yield stocks."
If we've learned anything so far in 2016, it's that we still have a lot to learn about how financial markets are going to behave in a new monetary era.
What was supposed to work — bank and consumer discretionary and others that benefit in a rising rate environment — has not. What wasn't supposed to work — gold and utilities — has done well.
In other words, forget what you think you know. If the early part of the year is any indicator, and history tells us it well could be, get ready for an unpredictable ride ahead.
"It's a market where you probably should expect big ups and downs with some gains, but relatively muted gains," said Ed Keon, managing director and portfolio manager at QMA. "One of the things we've been urging people to do is be cautious about their expectations. If you think you're going to get a 10 percent average return on your stocks over time, that's probably a little aggressive."
For the average hedge fund, 2015 was nothing to brag about, and even may have proved humiliating.
But a handful of portfolio managers outperformed their peers by a big margin, largely thanks to smart stock picking and shorting in areas like consumer stocks and biotech names.
One of the very best performances — about 47 percent upside apiece, according to investors in both funds — was shared by a pair of hedge funds: Melvin Capital, the roughly $1.5 billion hedge fund run by SAC Capital alumnus Gabriel Plotkin, and Perceptive Life Sciences, the $1.5 billion fund run by veteran biotech investor Joe Edelman.
Plotkin, a longtime consumer-stocks trader who declined through his lawyer to comment on the performance, appeared to benefit from a series of well-timed long positions, according to filings.
The U.S. may be in less for a bout of Asian flu than it is for a pretty bad fever. For investors, though, the symptoms will feel similar.
As for the broader economy, importing a recession would be a first for the U.S. That's one reason most economists don't expect a full-blown case of the "Asian Flu" that bedeviled the world in 1998, with China's slowdown instead part of a larger puzzle.
"The U.S. economy has been slowing for the past 18 months. To a large extent, that slowdown is reflective of what's going on in China," said Steve Blitz, chief economist at ITG Investment Research. "We need to understand that in an interconnected world, there's no such thing as segregating out one sector of the economy."
That sector which Blitz referred to is energy, and for much of the past year ignoring weakness there became a popular mantra among economists and Wall Street strategists.
Corporate profits are in for another brutal quarter, and it's not just the usual suspects dragging down everyone else.
S&P 500 earnings are expected to decline about 5 percent, depending on whose estimates you use, marking the third consecutive quarterly decline in what clearly has become a profits recession. If the trend holds up, it would be the longest stretch of earnings declines since the Great Recession was churning to an end in 2009, according to FactSet.
For most of 2015, the earnings struggles were dismissed with relative ease, chalked up to a temporary slump in energy prices that by and large was not infecting the broader economy or corporate structure.
However, that's beginning to change, and in a rather ominous way.
The earnings carnage is spreading from energy into other industries, with 6 of the 10 S&P 500 sectors projected to post negative year-over-year profit growth, according to S&P Capital IQ. While energy will still lead the decline with a nasty 68 percent drop, the materials group also is catching up, with a 24 percent estimated drop. Even without energy, profits would be up just 0.6 percent:
Pay no attention to those tumbling energy prices, the Fed seems to be telling the market, all will be back to normal soon.
That was the overriding message that came through from a summary of the December Federal Open Market Committee meeting, where central bank officials approved the first increase of its key funds rate in more than nine years.
In discussions leading up to the decision, Fed officials repeatedly indicated that the energy decline, which has seen U.S. crude prices tumble more than 30 percent over the past year and 63 percent from the late June 2014 highs, ultimately would abate and get inflation back on a normal trajectory.
Consequently, officials decided that the prospects for inflation normalizing toward a 2 percent growth rate coupled with the labor market tightening was reason for the Fed to get ahead of the curve and start hiking rates.
The trouble is, the market's not buying what the Fed's trying to sell.
The new year hasn't been terribly happy for asset managers, who collectively made a terribly wrong bet on the stock market.
During the last week of December, the group bought $8.6 billion worth of S&P 500 futures, according to Bank of America Merrill Lynch. Managers made the long market bet as the stock index was closing a moribund year that concluded with a modest price loss and a gain of just 1 percent when factoring in dividends.
Despite all of its pops higher and lower, the stock market only looks volatile over the past 14 months or so.
The fact is, the market, at least as gauged by the S&P 500, really hasn't done much of anything. Equities are almost right where they were when the market closed on Oct. 29, 2014.
That date may ring a bell.
It is, of course, the very day the Federal Reserve announced it had concluded the third round of its massive money-printing operation known as quantitative easing. The Fed had been using its digital printing press to gobble up bonds, an operation that in turn was helping drive liquidity and boost asset prices in hopes of goosing economic activity,
The result was an anemic economic recovery but a stunning rise in stocks — 200 percent in all off the March 2009 financial crisis lows.
Since that hallowed date? Pretty much nothing. The market was trading Tuesday within a couple points of where it was the day the Federal Open Market Committee announced it was cutting off the market's lifeline.
Monday's market mauling only helped underscore the Fed's big challenge this year, namely raising interest rates in a slow-growth environment.
In the best-case scenario, the U.S. central bank will have to deal merely with another year of a directionless market searching for price discovery, the end result being the flattish to slightly lower result that played out in 2015.
However, things could get considerably darker. Monday's sell-off represented the worst opening day of trading in 84 years and January has been an effective historical proxy for the market's full-year behavior.
Thus, in the worst-case scenario the Fed could find itself tightening policy to put a lid on inflation while the rest of the economy continues to grow at a mediocre pace, all while the financial markets remain in tumult. They had a word for such a condition in the 1970s: stagflation.
"I'm wondering about the possibility," said Jim Paulsen, chief market strategist at Wells Capital Management. "What if we get inflation evidence but we don't change growth? What does the Fed do?"
Big banks are battling to get ahead of the technology disruption unfolding in the banking industry, with financial technology startups turning into red hot investments.
According to industry watchers, investors are pouring tens of billions of dollars into the sector, with more to come.
"Some of the world's major financial centers are equally becoming known as centers for FinTech innovation," Toby Heap and Ian Pollari, Partners at H2 Ventures and KPMG, financial technology service firms, said in a statement that accompanied a report listing the top 100 global financial technology leaders in 2015. "Fintech is clearly not to be ignored."
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Major banks are doubling down on adopting new technology for tech savvy consumers. Bank spending on new technologies was predicted to amount to $19.9 billion in 2017 in North America, according to The Statistics Portal.
"Customers now want to interact with their bank whenever they want, however they want, and wherever they want, and to be able to shift seamlessly between channels." said a global banking outlook study from advisory firm EY.
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Jeff Saut, chief investment strategist at Raymond James, said the stock market looks like it's searching for a bottom.
The U.S. economy created just 151,000 jobs in January amid multiple other signs that growth is slowing, though the unemployment rate fell to 4.9 percent.