The mid-year forecasts are rolling in, and the outlook is mostly disappointing, with a chance of dread.
From BlackRock: “We are living in a low return world. Equity market returns have leapt ahead of economic fundamentals since the financial crisis. We expect lower equity returns than in the recent past—unless nominal GDP and corporate earnings growth accelerate.”
From TIAA: “Long-term headwinds in place since the Great Recession, including slower trade activity, slumping commodity prices, a strong dollar, and industrial overcapacity, are keeping global growth in check.”
From State Street Global Advisors: “Rising stock market volatility is a top concern of financial advisors for the second half of 2016, according to our mid-year survey. Therefore, we think investors should consider areas of the market that have historically been uncorrelated to stocks and bonds, such as gold, for potential risk mitigation when markets get turbulent.”
Dave Mazza, head of ETF and mutual fund research at State Street, said uncertainty about the direction of the U.S. and global economies is increasing. “Even though actual volatility remains low, as measured by the VIX, it doesn't feel that way,” he said.
The solution from SSGA: Build a stronger core portfolio, particularly in bonds and other fixed income. “There are opportunities in the credit market,” Mr. Mazza said, “But you have to be careful about not stretching too far for yield.” His current asset allocation is overweight in both cash and gold.
No one is predicting doom, but all suggest caution and a heaping helping of dividend yield. “We do think you need to be selective in the U.S., said Heidi Richardson, head of investment strategy for U.S. iShares. “We think people really ought to be thinking about where they are going to get growing dividends over time.” One favorite: preferred stocks.
“We're not saying, 'Hunker down to the safest of the safest,'” said Brian Nick, chief investment strategist at TIAA Global Asset Management. “But we have to realize that if we're not in the ninth inning, we might be in the seventh. We're not expecting to see the outsized outperformance in equities that we saw in 2013 and 2014. It makes sense to have at least one egg in every basket.”
What about those Federal Reserve interest rate hikes that were widely expected at the beginning of the year? “This year is off the table,” Ms. Richardson said. “In the next 12 months, one hike – maybe.”
Mr. Mazza said he sees one more Fed hike this year: “It's data dependent, but the bias for the Fed is to take some action.” Low rates abroad have pushed U.S. 10-year Treasury yields below the dividend yield of the Standard and Poor's 500 stock index, he noted.
“The last time I looked, there were more than 330 S&P 500 stocks with higher yields than the 10-year T-note,” Mr. Mazza added.
Mr. Nick said he thinks the Fed might raise in December, but “it's not a 50% chance this year. Anything geopolitical could create financial market stress, and the Fed is willing to consider that in its criteria for raising rates.”