The Outlook for Equity Markets
by George Hatjoullis
One striking thing about 2015 has been the volatility late in the year and the fact that markets have not moved far. Volatility near local or all time highs is never a good sign. The other notable feature is that all major markets are ending below the 200 day moving average (though the year is not over so there is time).
It is close to the all time high. The 21 day MA has crossed the 55 day MA downwards and is about to cross the 200 day MA. It is not a terribly negative outlook and the positions evidence is that sentiment is quite negative already. However, it is not positive either. The US dollar is strong and it is unclear why earnings should not continue to drift off. The Federal reserve is tightening, albeit slowly. There is evidence of stress in the credit markets. At best the volatile sideways path of late 2015 should continue for the first half of 2016. At worst we could see a significant correction down to 1800. This still would be consistent with a long term bull market.
This index has been in a downtrend since the summer and has suffered from the heavy weight of oil and commodity producers. It is below the 200 day MA as are both the 21 day and 55 day MA. It is also below the long term uptrend that dates back to March 2009. The UK is bedevilled by the Brexit issue though interest rate increases seem not on the immediate horizon. At worst it could drift off to 5600 but it is more likely to hold a 5800 to 6400 range in the first half of next year. Quite a lot has already been discounted by this index and some sterling weakness could give it a welcome boost. The dividend yield is very high and, despite some inevitable dividend cuts, it should continue to be supported by income hunters.
Euro Stoxx 50
This has been in a downtrend since March and is below the 200 day MA as as are the 21 and 55 day MA. The 21 day has crossed the 55 day downwards. This is despite a weak Euro and easy as possible ECB monetary policy. Prima facie this is not too auspicious. However, the downside looks very limited with good support at 3100. The eurozone seems an economy where positive surprises are more likely than negative surprises so it is hard to become very bearish. It is a market to look to buy rather than sell. The inflow of asylum seekers may also prove a positive surprise. Despite the obvious political and social stresses such population movements generate, they are normally growth positive.
The technical picture resembles that of the S&P 500. It looks very well supported at 18000. Moreover, in terms of growth and domestic inflation there really can only be positive surprises. The Japan economy does suffer from structural problems such as an ageing population (a few asylum seekers would help) and it may need a dramatic shift in monetary policy (monetary financing) to break the decades long deflation. However, this government seems determined to do whatever it takes so there is scope for optimism.
In summary, the first half of 2016 should be soft for equities. It is an opportunity to accumulate if you have a long term bullish perspective and the eurozone and Japan are probably the best markets to do so of the major markets. It should be noted that these economies are net beneficiaries of the collapse in oil and commodity prices. This is not to say that there are not risks but these are mainly geo-political and quite impossible to quantify.