(Reuters) - The strong dollar and middling corporate earnings growth will likely keep a lid on U.S. equity prices for a second straight year in 2016, even as the economy continues to expand, fund managers at the Reuters Global Investment Outlook Summit said.
Overall, managers anticipate returns in the single digits for the U.S. stock market. In a twist from the last few years, there is little fear of the Federal Reserve tightening policy, and in fact, a number of investors said they are looking forward to higher rates, if only because a rate hike would return the market to a more normal footing.
Activist investor Carl Icahn told Reuters that rates “need” to go higher, while Wells Capital Management senior portfolio manager Margaret Patel said a rate increase would boost lending to small businesses and prompt investors to expand holdings away from mega-cap companies like Amazon.com Inc (AMZN.O) and Google parent Alphabet Inc (GOOGL.O) that have accounted for nearly all of this year’s positive gains in the benchmark S&P 500 index.
However, fund managers say there’s no doubt that the Federal Reserve’s expected interest rate increase in December, which would be the first hike in almost a decade, will further strengthen the dollar, eating into revenue and earnings growth at a time when the European Central Bank and Japanese Central Bank continue to weaken their own currencies.
“Central banks, led by the Fed, are going on divergent monetary policies and saying we’re no longer all on the same side,” said Mohamed El-Erian, chief economic adviser at Allianz SE.
A strong dollar both crimps exports by U.S.-based companies and lowers the value of international sales when they are translated back into dollars.
Barclays estimates that the dollar will rise by 7 percent against a basket of major currencies in 2016, and coming on the heels of the dollar’s 15 percent increase so far in 2015 Barclays estimates that will cut potential revenue growth in the S&P 500 by half.
Fund managers uniformly predicted the U.S. equity market will at most post gains in the low single digits, suggesting that the long bull market that has returned more than 200 percent since it began in March 2009 is petering out.
“I am not very bullish in equities in general because I don’t think growth will be as robust” in the new year, said Maria Vassalou, partner at Perella Weinberg Partners.
Icahn said he is short the market overall, meaning he is betting stock prices will fall.
The benchmark S&P 500 once again turned positive for the year on Wednesday after minutes from the Federal Reserve’s October meeting showed several officials rallied behind a possible December rate hike. Barring a late rally, 2015 will be the first year since 2011 that the S&P 500 does not post double-digit gains.
Consumer, technology and small-cap stocks were among the few bright spots mentioned by the majority of fund managers participating in the summit.
“Jobs are rising, wages are rising, so the consumer outlook has got to be pretty positive,” said Mario Gabelli, founder and chief executive of Gabelli Asset Management. Gabelli said his funds are looking to go “wherever the consumer is,” adding to a position in General Mills Inc (GIS.N) in part because of its expanding line of organic and natural foods.
Patel, of Wells Capital, expects the equity market to pick up in the second half of 2016. She is bullish on home improvement companies such as Home Depot Inc (HD.N), and noted that medical device makers should prove immune to calls for lower prices that have upended the shares of biotech companies.
For Steve Einhorn, vice chairman of hedge fund Omega Advisors, even amid the cautious outlook overall, there is little reason to fear a looming bear market,
“Virtually nothing I look at today suggests that the U.S. is vulnerable to recession,” he said.
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Reporting by David Randall; Editing by Leslie Adler