One of my father’s favorite investing aphorisms is this:
“Trends tend to last longer, and go further, than anyone expects.”
I haven’t been in this business as long as he has, but I’ve already seen him proven right many times over. I’ve seen trends in gold, commodity prices, interest rates, bull markets and practically everything else outlast almost all expectations.
Investors have been waiting for interest rates to rise for nearly as long as I’ve been writing about investing, and don’t even get me started on inflation.
Whether it’s individual stocks or economic measures, Isaac Newton’s first law of physics proves remarkably applicable to most markets: Until acted on by an external force, objects at rest will stay at rest, and objects in motion will stay in motion.
This truism makes “predicting” what will happen in the markets a lot easier. If you learn to accept that the trend currently underway is likely to continue, you can be right most of the time without actually predicting anything.
With that in mind, here are my four big “predictions” for 2016—and a handful of investment ideas to take advantage of them. Feel free to save this email so you can write back to me in 12 months if my crystal ball turns out to be wrong!
1) Oil Prices Will Stay Low
This time last year, I was writing about oil prices hitting five-year lows. Then it was seven-year lows… and today, oil prices are close to 11-year lows. Along the way, hundreds of “experts” have tried to call the bottom in oil prices, and so far every single one has been proven wrong. Just yesterday, I saw this headline on CNBC’s website:
That’s the most absurd statement I’ve ever seen, and the article itself didn’t make much of an argument either. Never underestimate the potential of a falling asset to keep falling.
But even if you’re one of the stalwarts who’ve been waiting for the oil price rebound all year, it’s not too late to position your portfolio for this new era of low oil prices.
Here’s my advice:
Sell or avoid exploration and production companies, many of which won’t be able to make money with oil prices this low.
Instead, take advantage of the trend with stocks that actually benefit from low oil prices.
Airlines and automakers (SUV/crossover sales are up 14% so far this year) are always good bets. I particularly like General Motors (GM) today for dividend investors, and Southwest Airlines (LUV) recently made it into Cabot Top Ten Trader for its strong relative technical strength.
And in the high yield tier of my Cabot Dividend Investor portfolio, we recently added a unique beneficiary of low oil prices that pays dividends yielding 10.6% per year. This company is one of the biggest spot shippers of crude oil, meaning that they lease their tankers for immediate use on contracts usually lasting no longer than three months. So when tanker rates rise—as they have been doing over the past two years—so do this company’s profits. The kicker is that the company’s costs decline at the same time, since fuel oil costs for their ships are one of their major expenses! If you’d like to know the name of this company, all you have to do is click here and sign up for a no-risk trial membership to Cabot Dividend Investor, and you’ll get the name of this 10.6%-yielding stock tomorrow.
2) Interest Rates Will Stay Pretty Low Too
The Fed is probably going to raise interest rates tomorrow, but that doesn’t mean a sudden return to the high-yielding heyday of the 1980s. Instead, analysts expect the Fed to pursue a “slow and steady” course of small interest rate hikes, most likely separated by several months. Right now, predictions put the second rate hike in March, but I wouldn’t be the least bit surprised to see that date pushed out even further.
Longer-term, the Fed itself has said that it expects interest rates to “normalize” closer to 3% than the 4% we got used to in previous decades. Again, that number could easily be a lot lower than most people expect.
For investors, this means fixed income will remain unrewarding, and alternatives like dividend stocks are likely to remain popular.
3) “Missing” Inflation Will Continue to Mystify the Fed
This Sunday’s Wall Street Journal included the following headline:
While it’s disconcerting to read that our top economic policy makers “can’t figure out why” one of the fundamental metrics of our economy isn’t doing what they expected, you can feel a little better knowing that you don’t have to figure it out either. Inflation is determined by a lot of factors: demographics, oil prices, monetary policy, interest rates, changes in the labor market, and probably some stuff even I don’t understand.
But none of that matters when you’re using the world’s simplest crystal ball: Inflation is low, and is likely to remain low!
4) Millennials (And People Who Shop Like Them) Will Drive Spending
Bloomberg recently published a list of “14 Predictions for 2016 From The Brightest Minds In Finance.” One of the luminaries quoted was Katie Koch, a managing director at Goldman Sachs Asset Management. She thinks millennial spending will be a major trend for 2016, and my simple crystal ball agrees. Koch, who clearly knows a thing or two about demographics, told Bloomberg: “The rise of the millennials will have long-term investment implications.
Their spending trajectory is getting steeper and increasing compared to baby boomers, who are decreasing their spending as they retire.”
My confidence in this prediction has nothing to do with Katie Koch, although I’m sure she’s very smart, and has everything to do with the fact that this trend is already well underway and thus likely to continue.
Shifting spending patterns are already having a clear impact on many stocks, triggering profit warnings from Macy’s (M) and Nordstrom (JWN) that nearly sank the retail sector last month. Consumers are doing more of their shopping online, and while Macy’s and Nordstrom have websites, online consumers gravitate toward Internet-native companies like Amazon (AMZN) that have better websites, faster shipping and many reviews.
Macy’s and Nordstrom also warned that they expect lower holiday sales than in the past because consumers are gifting fewer clothes and accessories and more electronics and experiences (which they don’t sell). Investors who expect this trend to continue—as it is likely to—will find plenty of ways to take advantage of it.
Amazon is a good choice, as are companies that make all those electronics and the software on them. Growth investors will also find a lot to like in Activision Blizzard (ATVI), a video game developer whose stock is in a beautiful uptrend, while bargain hunters might want to consider GameStop (GME), down 11% year-to-date.
More conservative investors who like a little income from their tech companies could do worse than AT&T (T) and Verizon (VZ), which generate monthly income from all those connected devices, and have both traded about flat year-to-date.
That’s it for my “predictions,” and as soon as the New Year rolls around, I’ll go back to doing what I do best: finding the highest-quality dividend stocks for my Cabot Dividend Investor members. But it is fun to give in to the urge to act like a fortune-teller once a year, especially when all it requires is looking at what’s already happening!