Atlanta Capital Group 2016 Market Forecast

    Atlanta Capital Group 2016 Market Forecast


    Wednesday, December 09, 2015

    It is said the quickest way to demonstrate your foolishness is to make stock market predictions.

    Nevertheless, such common sense hardly precludes us or anyone else from trying!

    The Jewish Torah explains that the future is hidden from man so as not to interfere with his or her free will, yet paradoxically the future is predetermined … what ???? A dichotomy no human mind can understand.

    One flaw with forecasts in general is what is known as Recency Bias or the false belief that the recent past can be extrapolated into the future … which we know doesn’t work well.

    That said, the investment practitioner can speculate as much as he or she chooses but should realize the limitations of forecasting and always create adequately diversified portfolios that will perform over varying market conditions.

    Good, now that’s out the way, let’s get on with gazing into our crystal ball.

    We will begin with our prediction for the 10 Year US Treasury Note because we feel it will be the focal point for ’16.

    In a recent article, A Painstaking Move Ahead for 30-Yr Interest Rates, we postulated that long-term interest rates could correct higher merely as a consequence of its 25-year price pattern oscillating within a rising band. This may or may not be the long awaited bear market in bonds but merely a natural corrective action of a market that breathes in and out.

    That said, such an oscillation could easily take the 10-year rate to 3.0% and as high as 3.5% -- for our prediction we will take the mid-point at 3.25% by the end of 2016.

    Now, as to what would precipitate such a move higher is a more difficult question to answer. We think one or more of the following reasons could cause such a move:

    • Growth in the US. continues to accelerate albeit at sluggish levels by historical standards. As we approach full employment, wages begin to increase stoking (highly suppressed) inflation fears and driving long-term rates higher.
    • The economic slowdown in China reaches a hard landing proportion which causes mass selling of their U.S Treasury reserves to support and fund domestic stimulus programs.
    • As the Fed hikes short-term rates the knock on effect of losses in investment grade bonds causes a rush for the exit. Redeeming retail and institutional holders discover a severe lack of liquidity in the corporate bond market and try to hedge their portfolios by selling Treasuries.


    Fed Funds Rate 0.75% by the end of the year

    As with all asset classes, we also have no crystal ball when it comes to Fed rate hikes. So we will defer to the consensus with a slight twist.

    In our other research work we have begun to appreciate the accuracy of crowdsourced data. Whether it is estimates made by unbiased analysts, informationally advantage analysts or the sheer number of estimates somehow tapping into a mass consciousness we simply do not know.

    But we have seen firsthand how these estimates have, over time, been more accurate than the ‘experts’.

    Per Estimize the Fed Funds Rate is estimated to be at 0.75% by the end of 2016.

    Figure 1 - US Target Federal Funds Rate source: Estimize

    We find it interesting that the forecast stops short of the magic 1.0%.

    If you think about it for a minute, Fed Funds is currently at 0.125% and let’s assume a 0.25% hike in December 2015. Furthermore if we estimate a steady trend in rate hikes we could have 4 quarter in 2016 of 0.25% increases.

    Add that together and you get 1.375% by end of 2016. Our forecast is slightly higher than HALF of that, implying rate increases of a minuscule 0.125% per quarter (or thereabouts).


    This gels with the Fed speaking about gradual increases but also dovetails with our thinking that equities (discussed below) and economic data will be volatile, perhaps causing the Fed to pause or even the outside chance of a rate cut should the proverbial wheels come off!

    Equity Markets: S&P500

    As we ponder equity markets for 2016 we employ our 3-faceted discipline of fundamental, visual and sentiment analysis:

    Visually we find these 2 long-term charts interesting.

    The first is the S&P500 adjusted for inflation as defined by the consumer price index going back to 1981:

    Figure 2 - S&P500 adjusted for CPI source:

    It is interesting and probably not generally recognized that in real terms the S&P500 has made absolutely no progress since the highs of 2000! Remarkable really and may have something to do with the blizzard of monetary printing aka. quantitative easing.

    The second chart is the S&P500 similarly adjusted but this time by the 30-Year US Treasury bond going back to 1980:

    Figure 3 - S&P500 relative to 30-Year U.S. Treasuries source:

    Here again we are surprised that the S&P500 has been unable to outperform 30-Yr US Treasury Bonds to any great degree since 2000. Again, perhaps a consequence of deflationary forces suppressing interest rates to multi-decade lows?

    If we extrapolate our bond view for 2016 (higher rates, lower prices) and CPI (higher perhaps on wage growth) and gauge this as a logical turning point for the S&P500 to underperform both measures (charts are near their multi-decade highs) we are left with the conclusion that equity prices will be flat or move lower in 2016.

    Fundamentally, when it comes to the stock versus bond debate, we like the O’Higgins indicator. By comparing the S&P500 earnings yield to the Moody’s AAA Investment Grade Bond yield we can get a sense of which asset class is providing investors with the higher return.

    As of this writing the S&P500 earnings yield per Barron’s is 4.54% versus the Moody’s AAA Bond Yield of 3.97% - thus still favoring stocks from a fundamental valuation perspective. However, it wouldn’t take much in the way of higher rates for the pendulum to swing in favor of fixed income over equities. Higher rates may cause analysts to lower their earnings expectations and with flat stock prices would reduce the earnings yield thus reinforcing the case for fixed income over stocks.

    And finally, sentiment …we note that margin debt (speculative fuel) has been declining since April 2015 and that the advance/decliners (not shown) - a sign of how broad the market rally has been – has leveled off, indicating that this rally has become confined to a narrow group of stocks.

    Figure 4 - margin debt courtesy Advisor Perspectives

    All of which indicates to us that the bull market is tired and that stocks will be flat at best in 2016 – with the proviso that this narrow rally in growth stocks, particularly big tech, may have a ways to go yet.

    Our forecast for the S&P500 at year-end 2016 is slightly lower @ 2,025

    West Texas Intermediate Light Crude

    Figure 5 - West Texas Intermediate Crude Oil source:

    On the 16th of August 2015, Ambrose Evans-Pritchard of the U.K.’s The Daily Telegraph published a brilliant op-ed piece about how the Saudis had grossly miscalculated their oil output.

    Prior to November 2014 the Saudis had kept supply tight and thus held prices too high for too long. This allowed the US Shale industry to flourish. Then in November 2014 they opened the spigots in an attempt to choke the shale industry. However they did so into the teeth of a slowing global economy.

    Saudi itself relies on oil for 90% of their budget revenue.

    Citizens pay no income tax and a complicated system of political patronage exists to keep the Saudi Royal family in power. Now, with a costly war against Houthis in Yemen and as the self-proclaimed leaders of the Sunni cause against Iran and dominance in the Middle East, the International Monetary Fund estimates that the budget deficit will reach 20% of GDP this year, or roughly $140bn. Reserves may be down to $200bn by 2018.

    The Saudi are trapped!

    Add to that a new geopolitical power center has formed, comprising of Russia, Syria, Iraq and Iran with vast Oil reserves – and one could draw a logical conclusion that Saudi Arabia may have every interest in keeping the price of Oil low.

    How Low?

    With supply being highly elastic and demand – from emerging markets at least -- remaining sanguine due to the growth slowdown there and marginally higher from the developed world, one could expect the price of Oil to remain low in 2016.

    Given that none of this is a national secret and that the market is certainly aware of the supply demand dynamic, West Texas Crude (“WTIC”) has been moving lower since 2014.

    We suspect that most of the price damage has already occurred – even though WTIC is below $40 per barrel as we write this - and any geopolitical event will likely support the price of Oil.

    Thus our prediction for 2016 is that WTIC will find a floor somewhere between $30 and $40 per barrel, will spend most of 2016 oscillating within this range but given how suppressed the price has become there is a chance the pendulum swings in a dead cat bounce to end 2016 at ~$50 per barrel.

    Euro:U.S Dollar Exchange Rate

    We are reminded of an interview Stanley Druckenmiller (of George Soros fame) gave to Bloomberg TV in April 2015 wherein he comments that he has never seen a currency adjustment occur in just 12-months, rather these are multi-year trends – and he was particularly referring to the Dollar.

    Such is our respect for Mr. Druckenmiller that this may be enough to forecast the Euro at parity to the Dollar by year end.

    In this instance we believe the consensus is right. The growth prospects of Europe versus the US could not be more different.

    Europe is mired in a fractured Union economically speaking with no fiscal discipline in the South versus a financially strong North. They are also confronted by a refugee crisis of as yet unquantifiable proportion – think state healthcare, housing and other social services. A festering terrorism problem and general deflationary conditions as evidenced by negative interest rates.

    Thus Draghi will continue to stimulate through Bond purchases and lower negative interest rates aka. money printing which through the natural law of supply and demand should weaken the Euro.

    The U.S story is well documented so we won’t dwell on it here; suffice to say that we are facing positive growth resulting in a more hawkish monetary policy relatively speaking. Thus adding to the interest rate differential between the two zones and contributing to Dollar Strength.

    Euro/Dollar by the end of 2016 – PARITY.

    Final thoughts…

    We think 2016 will be a continuation of the challenging market environment we saw in 2015. There will be pockets of opportunity as mature bull markets tend to exhibit their most spectacular price gains right near the death. And plenty of risk, notwithstanding a general election in the world’s biggest and most influential democracy.


    Thank you for reading my post. I regularly write about private market opportunities and trends. If you would like to read my regular posts feel free to also connect on Linkedin, Twitter or via Atlanta Capital Group.

    Greg Silberman is the Chief Investment Officer of Atlanta Capital Group. Atlanta Capital Group specializes in creating custom private market solutions for RIA/Family Office clients and is an active acquirer of independent wealth management practices.

    Advisory Services offered through Atlanta Capital Group.

    Nothing in this article should be interpreted as a recommendation to buy or sell any security. Please conduct your own due diligence.                

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    Chasing the Road Runner …

    Since the onset of the Fed’s Operation Twist and subsequent open-ended Large Scale Asset Purchase program (commonly referred to as QE3), the S&P 500 has fared quite well, gaining roughly 70% (15% p.a.) over the last four years. Many market participants feel emboldened after experiencing these gains, but they generally fail to recognize the source of the gains and the speculative nature of those gains. Largely unrecognized is the fact that nearly all of the market’s advance over the past four years have been the result of PE expansion, as corporate profits have increased less than 5% (1.1% p.a.) and failed to keep pace with equity prices and investor enthusiasm.

    Right now, Mr. Market appears a bit like Wile E. Coyote whose business card simply read: “Genius”.

    That’s where we find Mr. Market today. He is beginning to realize that his enthusiasm has gotten the better of him and led him to bid prices up too far above earnings. Having overshot the mark, gains from this point forward will be limited by earnings growth (which is currently negative) and may likely be impaired by an eventual PE contraction now that the Fed has begun to wind down a long period of policy accommodation.

    While it’s fine to want to remain optimistic, we should all heed the late Peter Bernstein’s admonition about the difference between an optimist and a believer in the tooth fairy.

    Dorsey D. Farr, Ph.D., CFA

    kdhb V Capital Management, LLC

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    Prices and Profits on Divergent Paths

    Opportunities in securities markets often stem from the fact that fluctuations in corporate earnings tend to generate exaggerated movements in share prices. Transitory deviations between prices and fundamentals provide patient, long-term investors with the necessary conditions to generate outsized returns. However, these same deviations create risks at times when price gains outpace business fundamentals, which is where we currently find the S&P 500.

    Earnings growth has stalled and an earnings recession is now underway. As of September 30, the trailing four quarter cumulative profits for the S&P 500 have declined by 14.2% from year ago levels. With profit margins coming off record highs, it seems reasonable to expect that profit growth will face continued headwinds as margins normalize over time.

    Weaker earnings may not alter investor enthusiasm for stocks in the near term, but the gap between price gains and earnings improvements over the past several years is troubling. From the third quarter of 2011 through the third quarter of 2015, per share earnings for the S&P 500 index have increased from $86.98 to $90.84 – a gain of only 4.4% (1.1% annualized), while the index has advanced 69.7% (14.1% annualized). Virtually all of the market’s gains over the past four years have come from multiple expansion, resulting in a growing gulf between market prices and corporate earnings.

    How much further this gap grows or how long it persists is impossible to guess, but it is clear that by almost any reasonable measure U.S. stocks are richly valued. At the end of September, the S&P 500 traded at 21.1x its reported earnings for the previous four quarters and 24.6x its average earnings for the past decade (adjusted for inflation). After a sharp October rally, the U.S. equity market is even more expensive and seems likely to deliver disappointing long-term returns to index investors and others who own stocks without regard to value.


    Dorsey D. Farr, Ph.D., CFA

    V Capital Management, LLC

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    6th Grade Lessons for Predicting Markets

    Disregarding the fact that we were gambling without adult supervision at age 12, we were learning the art of PROBABILITY ASSESSMENT.

    A few years ago I had the good fortune of lunching with Jack Shwager of Market Wizards Fame.

    For those of you who have never heard of Jack or Market Wizards – Bueller Bueller - I highly recommend the series for insights into the minds of the world’s greatest investors and traders.

    What will strike you fairly early in your voyage with Jack is that the ‘Greats’ have an uncanny ability to assess Odds and bet (over the long-run) when probabilities slightly favor their strategy.

    Of course, risk management is key so as not to get blown up during a cold spell. But unlike Poker or Blackjack the market doesn’t give you the odds, that’s for you to work out - whichever way you can!

    Let me tell you how I honed my finely tuned Probability detecting Antennae


    When I was in the Sixth Grade - Red Red Wine and Karma Chameleon were playing on the FM - I went with my friends to the Rand Show.

    The Rand Show was an annual event in Johannesburg with its roots in an agricultural fair where farmers would parade livestock and prized Bulls for auction.

    We went for the Amusement Park and above all we loved to play Darts!

    This particular game consisted of a dart board covered in diagonal lines of Red, White and Blue positioned oh about seven feet from the thrower.

    The number of Red and Blue lines made the probability of hitting one of those colo(u)rs 50% but the chance of hitting a White was much slimmer 33%.

    We would put down a 50c coin on a color tablet in the front then throw the dart.

    If you put 50c on Red and hit Red you got paid 1:1. That is you made 50c. Same with Blue. If you hit white you got 2:1 or 1 Rand in return for your 50c.

    If you chose the wrong color you lost all.

    Disregarding the fact that we were 12 years old and actively gambling without any adult supervision, we were developing early skills in PROBABILITY ASSESSMENT.

    Hilariously (and frighteningly) that got our speculative juices flowing to such an extent that over the next weeks and months we would go to each other’s houses and play aka gamble on a sequence of games such as:

    • Poker
    • Blackjack
    • Backgammon (my favorite to this day … one day I will recount the story of how I beat the local Kibbutz champ in Israel causing them to bring in a regional champ to whip my a**).
    • Roulette
    • And finally, a board game called Risk which took an inordinate amount of time to play and normally ended up in an argument or sometimes a good ‘ole punch up!

    Aaaah Youth!

    2016 Market Forecast

     This article will be in 2 parts.

    The reason, I have been invited to present to the press at the Atlanta Society of Chartered Financial Analyst’s 2016 market forecast day on December 14th.

    So as not to let the proverbial cat out the bag, I will save those forecasts for part two of this article after December 14th.

    For now I will take a look at how we did with our 2015 forecast.

    Two things to consider before we dive in:

     I am writing this prior to 2015 ending – anything can and does happen in the markets so I reserve the right to re-score if something extreme occurs over the month of December.

    1. Our forecast for 2015 was not published publicly. Instead it went out to our clients so you are going to have to trust me when I say that is what we printed at the time.

     We said:

    “In terms of our 2015 outlook we think it will be acknowledged that the international picture may not be as bleak and that US growth may not be as rosy as we have been led to believe. As a result, the dollar may give back some of its 2014 gains and the Euro could strengthen. Long-term interest rates may be volatile but should remain range bound.

     The perception that global growth was not as bleak was flat out wrong … despite numerous QE programs in Japan and Europe global growth proved to be continuously weak al’a China.

    US growth on the other hand, although positive, sputtered forward and definitely was not as rosy as expected at the end of 2014 – cite the numerous delayed signals by the Fed to raise interest rates.

    After an early rise, the Dollar did spend much of the year in correction mode and at its nadir in August touched the highs of 2014 but never once came close to giving back 2014 gains.

    We were correct about long-term interest rates which were volatile and oscillated between 1.65% and 2.48% on the 10-Year US Treasury Note.

    We Said:

     “The volatility we have grown accustomed to in the equity markets should continue, a meaningful equity market correction would not surprise us, but by the end of the year the markets may be more or less at same level as where it began. However the trends from 2014 will reverse somewhat so:
    o       Mid and small cap outperform

    o       Long/short outperforms

    o       Investors continue to bid up all assets that provide yield (e.g. real estate)

    GS: Well it was certainly a more volatile market in equities than we had grown accustomed to over the preceding 5 years. And while December performance is not quite in the bag, the markets as measured by MSCI ACWI or S&P 500, are more or less flat. The meaningful correction during Q3 occurred but for all the bluster was a measly -12% on the S&P500 – hardly a swoon but we will take it.

     The rest of our forecast we consider a push … again without final performance numbers, at the time of this writing, mid-cap and small caps, long/short and real estate (listed REITS) are all pretty much in line with Large Cap US stocks. However, their paths were quite divergent:

     Mid-caps, small caps and long/short outperformed during the first half but underperformed during the second half – Third Quarter in particular during a volatile equity correction.

     Yield generating REITS and we throw in Business Development Corporations here underperformed most of the year in sympathy with rising interest rates then outperformed as rates fell in Q3.

     One outlier in the yield generating universe was MLPs which grossly underperformed the market - likely due to falling commodity prices. I never agreed with the argument that they were merely tollbooths with no commodity price exposure.

     Through complete dumb luck we did not make a forecast about emerging markets and commodities --we may have said they too would rebound from their 2014 underperformance – instead they bore the brunt of the selling in 2015.

     Given the low dispersion in overall returns our forecast misses and hits didn’t detract or add from overall performance – again luck!

     So we give ourselves a passing mark of B.

     Let’s see if we can do better in our 2016 forecast. We already tipped our hand slightly by publishing A Painstaking Move Ahead for 30-Yr Interest Rates

     Until then…

    Your ever-vigilant, Sahlab drinking, Backgammon playing Market Analyst



    Thank you for reading my post. I regularly write about private market opportunities and trends. If you would like to read my regular posts feel free to also connect on Linkedin, Twitter or via Atlanta Capital Group.

    Greg Silberman is the Chief Investment Officer of Atlanta Capital Group. Atlanta Capital Group specializes in creating custom private market solutions for RIA/Family Office clients and is an active acquirer of independent wealth management practices.

    Advisory Services offered through Atlanta Capital Group.

    Nothing in this article should be interpreted as a recommendation to buy or sell any security. Please conduct your own due diligence.                  




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