According to the Schwab 2016 Midyear Market Outlook, investors and their financial advisors should be preparing for change.
“The second half of 2016 is likely to see changes in the political landscape, monetary policy and market trends,” the outlook states. “Donald Trump and Hillary Clinton are set to face off for the U.S. presidency and their respective policy proposals and a contentious campaign season may contribute to market volatility as the election nears. Adding to the turmoil is Britain’s vote to leave the European Union.”
Schwab predicts it may take time for the shock of the Brexit vote to fully work through the economic, financial and political systems, which may also lead the Federal Reserve to hold off on raising interest rates.
“These factors, along with any change in the trajectory of the dollar’s value against other global currencies, may result in a change in the relative performance of various asset classes and sectors,” according to the outlook.
Experts from Schwab each outline their predictions for the U.S. and global markets, as well as fixed income, in the second half of 2016.
Schwab experts expect U.S. economic growth to remain sluggish for the second half of 2016.
“The U.S. economy continues to move like a SLUG — with Slow, Lumbering, Unstable Growth,” according to Liz Ann Sonders, chief investment strategist at Schwab. “Every time it seems to take two steps forward, it falters. This phenomenon is not new. There has been a meaningful slowdown in growth every year since the economic expansion began in June 2009, including this year.”
The silver lining is that a sluggish pace of economic growth, accompanied by low interest rates and low inflation, is not an unfavorable backdrop for equities in the longer term, Sonders says.
“This is why we don’t believe a major bear market is likely,” she says.
Sonders predicts that the aftermath of Brexit, along with the “highly contentious” U.S. presidential election, are likely to bring continued bouts of volatility and uncertainty in the second half of the year.
“The Brexit-related hit to financial conditions supports a more dovish Fed and suggests a continuation of the frustrating range-bound and volatile stock market behavior,” Sonders writes.
This volatility and uncertainty – as well as slightly elevated stock market elevations and weak earnings growth – supports the rationale behind Schwab’s continued “neutral” rating on U.S. stocks.
“By ‘neutral’ we mean that investors should remain at their strategic equity allocations while taking advantage of bouts of volatility to consider tactical rebalancing of their portfolios,” according to Sonders.
One of the more positive indicators for the market looking into the second half of the year is investor confidence, Sonders says.
Sonders points to the American Association of Individual Investors survey that recently showed the lowest level of bullish sentiment in more than 10 years, and the highest level of neutral sentiment in more than 13 years.
“Following occurrences like this in the past, the stock market generally had exceptionally strong returns a year later, with a consistent track record,” she writes.
For the second half of 2016, Schwab expects global economic growth to remain weak and uncertainty to linger surrounding the eventual impact of Britain’s decision to leave the Europe Union.