US STOCKS: We believe the bull market in US stocks will remain in place, but we only expect single-digit annual returns. We anticipate a prolonged but slow expansion, which is shifting gears as wages start to grow.  This is better for economic growth than for earnings, as higher wages pressure already high margins and the strong dollar remains a headwind for global companies.  We expect mid-single-digit returns from the S&P 500, as we believe current valuations put a restraint on the upside potential. Within our portfolios, we currently like homebuilders and bank stocks; we recently added oil services to increase our energy holdings, which we underweighted in 2015.  In contrast, we are avoiding utilities and REITS, which are highly sensitive to interest rates.  We are cautious on retailers and healthcare stocks.

David Fuller's view

Here is a PDF of The Weekly View.

So, how does this forecast tally with subscribers’ views and our own outlook?

It is certainly a plausible outlook in terms of my perspective.  However, 2015 has been a tricky year, with a number of cyclical (20% plus) bear markets among some developed markets, most emerging markets and worse still for primarily resources producers.

Earlier in 2015 I forecast that Wall Street would experience a first 10% plus correction in over four years, before the end of October.  That duly occurred but I have been concerned by some warning signals more recently: 1) Wall Street’s continued deterioration in market breadth, signalled by the underperformance of the Russell 2000 Index, meaning that fewer and fewer shares are supporting averages near current levels and a sustained push above 1200 is required to indicate improving breadth; 2) this December’s seasonal underperformance – the worst since 2002; 3) the risk of a Doller Index breakout to the upside of its current range – it will probably require continued intervention to prevent this; 4) the weakness of crude oil and metal prices, ensuring that primarily resources economies remain in severe recessions.

In conclusion, Wall Street needs to respond to favourable seasonal factors during the first four months of 2016, with market breadth clearly improving, against a background of the Dollar Index ranging below the 100 level, while commodity prices firm on supply cutbacks, if the US stock market is to more than range at best.  Meanwhile, an orderly recovery by China would help global sentiment.