Wall Street kicked off the New Year with the worst start since 2008 with the Dow Jones Industrial Average plummeting more than 450 points at one point on opening day, Jan. 4. By the end of the week, the Dow closed down triple digits, ending one of the worst first weeks ever. The markets have continued this week, now entering correction territory. Could the recent market turmoil be a harbinger of more in 2016? With an open presidential election, a rise in global terror, a sluggish economy and upcoming interest rate increases, 2016 may be in for a bumpy year on Wall Street.
There are a number of pessimistic predictions being floated around, with some warning about a recession or even a full-on crash. Slowing global growth has been one of the predominant investing themes in 2015. As the shockwaves from Europe, China and the developing markets spread, investors are wary that the U.S. might be the next powerhouse to fall to the global slowdown.
Even though these estimates may prove correct, they are probably too pessimistic. The $73.5 trillion global economy is expected to grow 3.1 percent in 2015 and 3.6 percent in 2016, according to the latest International Monetary Fund projections. These projections may prove too optimistic – China accounts for approximately 30% of global growth. As China fails to grow, so goes the global economy.
If we take a step back, a U.S. economic recession still seems unlikely, though the risk of such event is rising. The economy might not perform as well as we would like, but it does not seem to be like any of the economic disasters we’ve seen in the past. From a technical standpoint, a recession is defined as two negative quarters of GDP. If you look at the current economic situation in those terms, I don’t see a recession happening in 2016. However, if there were continued extenuating circumstances, such as extreme weather conditions that limited the consumer from putting money to work or an emerging market collapse, could it be possible? Yes. But typically, even in the event of extreme weather, we’ve seen resiliency from consumers as they have been eager to go out and spend money. Though growth may be slower and happen at a sluggish rate, I don’t see two quarters of negative GDP in 2016.
However, two sectors that I see doing well in 2016 are defensive sectors and Technology. They’re both positioned pretty well right now. Defensive sectors tend to provide better protection during market volatility while Technology continues to innovate, and it’s likely to see continued growth in 2016.
More specifically, Forbes reported that some technology companies, particularly ones like IMAX, are prepared for big performances at the end of 2015 and into 2016. With blockbusters like Star Wars: Episode VII, Spectre, and The Hunger Games: Mockingjay – Part 2 all having hit theatres through the end of 2015, look out for extreme growth in IMAX and other tech companies. For areas I am not too positive on are anything tied to emerging markets or commodities, e.g., Materials, Industrials and Energy. I just don’t see them doing as well as the prior Tech and defensive sectors.
So how do investors navigate through an upcoming year of uncertainty? To position a portfolio for a successful year, investors should adjust their thinking from short-term to long-term. Now is the time to look to strategies that are less vulnerable to these mounting economic and political risks. In a climate like this, low volatility strategies are primed to do well in 2016.
David Harden is President and Chief Investment Officer at Summit Global Investments, an SEC registered investment adviser specializing in low volatility investment strategies. Learn more at www.summitglobalinvestments.com.