These stocks are facing little of the headwinds that are currently souring the market and have strong, growing dividends that will propel share price growth and total returns. In what could be a challenging investing year for most, it will pay to stay cautious.
As much as I think it is short sighted most of the time, I think that the economy and markets in 2016 will end up looking a lot like 2015. The major difference will be a swapping of rankings among last year’s winning and losing sectors in the stock market. A growing dividend-focused investment strategy may turn out to be the winning play when we reach the end of 2016.
Economic growth continues to flatten. The U.S. economy has been stuck in a plus or minus 2% annual GDP growth range since coming out of the Great Recession in 2009. In spite of the low GDP growth, the U.S. stock market has done very well over the last six years. From the start of 2009 through the end of 2015 the S&P 500 returned an average of 14.2% per year or 253% in total return for the period.
However, in 2015 the bull market slowed significantly and the S&P 500 ended the year with a 1.25% total return including dividends. The early days of the bull market were a general recovery from the grossly oversold condition at the end of the 2008-2009 bear market, which saw a 50% or more decline in share values. The continuation of value gains came from a combination of growth in the technology sector, international sales growth by the large multi-national companies, and some financial engineering, such as share buybacks to boost earnings per share numbers.
As we move into 2016, those factors that supported the bull market have mostly vanished. Economists are predicting 2% global economic growth, to match the low growth rate of the U.S. economic system. With China in particular and other emerging markets experiencing slower or no growth, the U.S. multi-nationals will struggle to keep revenues and profits growing.
Share buybacks and similar maneuvers are no longer viewed by investors as a saving factor when revenue and profit growth are slowing. Looking at the first few days of trading in the New Year, it seems that investors are also either losing faith in the continued growth in the tech sector, or just taking profits against the possibility of a serious market correction or even a bear market this year.
