|Written by Rob Goldman|
Ever get the feeling that stocks have no clue which way they wish to move? That’s why we outline the top 4 things that will drive stock direction over the next 12 months in this week’s issue of The Goldman Guide. While we shoot a warning shot across the bow due to Asia growth problems brewing, the 2016 Presidential Election is sure to have a major impact. The good news is that since 1979, the performance of the S&P 500 Index during election years has been strong. (Check out the table on page 2 of The Guide.)
Remember the interest rate hike last week? Well, that means it is likely the Financials sector will have a banner year in 2016. With that in mind, we have identified a stock you can “bank” on. Not only is it enjoying solid growth, but just last week it raised its quarterly dividend by 25%. Plus, if the long-awaited M&A activity occurs in this segment of the banking space, it could have a strong performance for the first half of 2016.
TOP 4 THINGS THAT WILL AFFECT STOCKS
Basketball is a game of streaks and when evenly matched teams play each other, whichever team tends to handle the streaks the best often come out on top. Given the volatility of late and the expectation of both headwinds and tailwinds ahead, what will be the major drivers of the markets and stocks in particular? I’m glad you asked.
#1: Energy and other Commodities
As we have all witnessed in recent weeks, when oil gets smacked, so do we. While we all want low prices at the pump, we’d be wise to hope for stabilization followed by higher prices. However, it may not happen until mid-year.
#2: The Beast of the East
Somehow we have forgotten that China’s growth is slowing and it is not likely to return to high levels for some time. It is already impacting Japan and Korea and it is just a matter of time before it reaches us.
#3: Interest Rates/Dollar vs. Currencies
The Fed said it will stage four more increases next year. Don’t count on it, partly due to reason #2 which will prompt a rise in the dollar anyway. Still, the back-and-forth is likely to cause periodic consternation.
#4: The 2016 Election
Most pundits know Clinton has had the necessary delegates for the nomination in her purse for many months so all the debates, stumps, etc. are a mere formality. The question is will Trump face her? It is looking likely and while both would probably suck something awful as leaders of this great nation the only thing I can say is that our study published in the 8/23/15 edition of The Goldman Guide indicated that since 1979, stock market performance in election years has been great and even in the year after results have been pretty solid, on average.
Election Year Stock Market Performance
As illustrated below, since 1979, the Presidential election years have endured no down years (although recent returns have been weak) and the average annual return is substantially higher than in other years. Moreover, the returns during the first year in office for Presidents haven’t been too shabby when you eliminate the unusual circumstances in 2000 and 2008.
Does this mean that either the Hillary or the Donald potentially enjoys such bliss? Check back with me in about 11 months.
The Stock Market Today
Now that the first salvo in the interest rate game has resulted in a 1/4 rise in rates, it is time for the long forgotten sector to make its move. Financials would occasionally comprise more than 20% of the S&P 500 Index. Today, that figure is 16.6%, but had been lower in recent months. Look for this to rise at the expense of materials and industrials, along with energy.
With attention now on the Financials sector again, we have identified a stock we believe that you can “bank” on as the rise in interest rates will facilitate top line revenue growth with the increased borrowing/lending spread that will follow.
Perhaps foreshadowing these events has been Preferred Bank (NASDAQ – PFBC - $33.53), a regional bank headquartered in Los Angeles which has enjoyed a 26% price return over the past year. The first metric that struck us concerning PFBC was the operating margin of 60% versus the industry average of 35%. This efficiency will be critical in translating increased revenue to EPS performance. The growth story is also impressive with a forward P/E of 14x versus a trailing of metric of 16x with a five year PEG of 1.5x. This growth prompted a 25% increase in the quarterly dividend last week which is a nice bonus as the new annual yield on this growth-oriented bank is 1.8%. Our mid-year target is $38 and could be higher if the long-awaited M&A cycle hits the regional bank segment in 2016.
Great info, insights, and hard-hitting stories make up this week’s Say What? feature...
And its effect on policy and the upcoming election will be??? You be the judge.
Asia looks like it will be enduring growth issues in 2016.
The New York Times
A great, feel-good story.
That is the hope.
Conspiracy? Maybe. Worth the time to read? Definitely.
Just the Stats!
AAII Sentiment Survey (figures rounded)
For the first time in many weeks, both polls/surveys moved in the same direction: Bearish—with declines in both Bullish and Neutral sentiments. Due to the Christmas and New Year’s holidays, do not look for much in the way of new data, at least any that is material on this front. We maintain that the slower holiday period should prove to be fruitful for the small cap space, although commodity-related stocks may not perform too well.
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