January 8, 2016

January 8, 2016

2016 Outlook
As regular readers know, we view the U.S. Dollar as the key to the outlook for stocks in 2016. (In the summary section above, we explain why a strong U.S. Dollar has gone from being a positive for the market in years past, to being a negative for the stock market in today’s nervous environment.)  If the Dollar rallies substantially, increasing its very large appreciation against almost all currencies over the last four years, investors may experience tough sledding in U.S. stocks.  In this situation, foreign stocks will do better than U.S. stocks, especially companies in Japan and northern Europe.

We also expect market volatility.  Volatility will create both risk and the potential for substantial reward.  It will create problems for those who are not prepared and rewards for those who do the research to find great companies selling at bargain prices — and then buy these companies when the market has corrected.

In our view, the U.S. stock market is at risk of a correction of 10 to 15 percent sometime in 2016.  With this probability in mind, our plan is to hold a large proportion of cash in client accounts, waiting for an opportunity to buy good values at a discount after the market correction.

The stock positions that we currently hold are partially hedged with inverse ETFs or short sales (for those clients who sell short).  Thus, our net long exposure is currently low for client portfolios.  Our hedged and short positions are in emerging markets or in high-volatility U.S. stocks, and our long positions are in companies which we view as underpriced and possessing excellent growth prospects.

Our outlook for emerging markets continues to be pessimistic due to the risk of further depreciation of their currencies as the Dollar strengthens.

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