Investors are hit with new headlines every day: a weak jobs report, rising gasoline prices, unconventional election politics. It can be tough to make sense of the barrage of constantly changing news and events.
Here is a look at seven key questions investors need to consider now.
Are dialed-down forecasts for the U.S. economy a concern? Slower economic growth is, of course, a worry. “Actually, it’s the whole ball game,” says Guy LeBas, chief fixed income strategist at Janney Montgomery Scott in Philadelphia. “The real story, however, is much longer term than 2016. With population growth running about one third the rate it was in the 1980s and 1990s, and productivity gains still slowing, it’s likely economic growth will only average 1.6 to 1.8 percent, even in relatively good times. In this context, 2016 is actually one of those ‘good times,’ when the economy is neither running too hot nor too cold.”
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How could Federal Reserve rate hikes impact the economy this year? The surprisingly weak May employment report, which revealed only 38,000 new jobs were added last month, pushed the odds of a Fed rate increase at this week’s meeting to less than 4 percent, according to Fed funds futures markets.
Analysts are now pointing to the July Fed meeting as the next potential window for an interest rate increase. “If the jobs report proves to be an outlier, and we have a decent return next month, we are more likely to see a rate hike in July. We put that at about a 50-50 chance right now,” says Hank Smith, chief investment officer at Haverford Trust.
Even if the Fed hikes rates once or twice this year, it won’t affect lending or economic activity, and won’t be that big of a deal, Smith says. “The lower-for-longer environment will continue along with sub-average growth and a low probability of recession,” he says. “Those themes remain in place with or without any rate hikes.”
What are the positive factors for the U.S. economy in the second half? There are bright spots. Consumer spending continues to grow and housing also continues to improve, says Brad McMillan, chief investment officer for Commonwealth Financial Network. “Strong underlying trends should support continued growth in both of these areas, with wages and household formation doing well. With consumers starting to spend, despite the poor recent job trends, the possibility of an acceleration in growth is real.”
Another shift from last year is the weaker U.S. dollar, which can offer a positive economic boost.
“The weaker dollar should be a tailwind for exports and manufacturing after it was a big headwind from 2014 through early 2016,” says John Canally, vice president at LPL Financial.
What could the presidential election mean for the stock market? A market can deal with good news and bad news because it can price certainty, says John Conlon, chief equity strategist at People’s United Wealth Management. “It does not like uncertainty.
“This election is generating more uncertainty than any other in my lifetime because the range of candidate policies is wider than it has even been,” McMillan says. “Rather than a typical center-left, center-right pair of candidates, you have one candidate being pulled to the left and another committed to policies outside the normal range. Business is reacting rationally by holding off decisions until more certainty is available — a trend which is unlikely to subside until the election, and maybe not then.”
Heading into the July party conventions rhetoric remains high, “which makes it too early to truly have an understanding of each candidate’s impact on the economy or sectors. This could all change on a dime, though, if the election results in a unified Congress and president,” Smith says.
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Control of Congress will be important, Canally says. “The market has lately favored divided government, and if Mrs. Clinton wins, the Democrats are likely to retake the Senate, but unless it is a landslide win for Clinton, the GOP should hold the House, maintaining a divided government.”
What risks does the economy face in the second half? Risks for the economy are always present and can be either known risks or those that are unforeseen, says Bill Northey, a chief investment officer with The Private Client Group of U.S. Bank based in Helena, Montana.
Northey lists the top known risk as capital market dislocation following a potential U.K. vote scheduled for next week that could have it exiting the European Union. Other risks include the loss of business and/or consumer confidence due to an acrimonious election cycle, which results in spending and investment paralysis, as well as a policy error by the Federal Reserve, he says.
Where do analysts see the Standard & Poor’s 500 index at the end of the year? Brace for choppy, back-and-forth action in the stock market. The Private Client Group of U.S. Bank pegs the year-end price target for the S&P 500 near current levels at 2,100. “Election cycle dynamics introduce a degree of uncertainty for the markets that will likely generate more volatility and keep a lid on near-term performance. We expect the stocks to trade in a sideways range until after the election, which will remove uncertainty,” Northey says.
“Additionally, the focus will shift to 2017 earnings where the resumption of earnings growth can provide some buoyancy to the equity market,” he says
What are the best money moves for investors? This is a year in which the markets may grind to a moderate single-digit returns, Smith says. “We aren’t looking for huge returns on equities so investors should position themselves defensively,” he says. “We like names that are blue-chip companies with better-than-bond dividends. You can still find plenty of names that have dividends that beat the 10-year yield.”
Stay focused on your long-term objectives and use the current environment as a check for your appetite for risk, Conlon says. He agrees that investor expectations should be adjusted down to single-digit returns due to slow economic growth and an average market valuation that is not cheap.
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Conlon likes the energy and industrial sectors right now. “The energy sector due to the recovery in oil prices and the approaching crossing of supply with demand. Industrials due to low valuations, high cash flow, and attractive dividend yields,” he says.
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