What Investors Can Expect in the Second Half of 2016

Nick Colas, chief market strategist at Convergex, says investors can expect low interest rates and 3% to 5% gains over the next 12 months.
By Bret Kenwell ,

The stock market's rebound has been "quite dramatic" following its initial decline from the U.K.'s Brexit vote, according to Nick Colas, the chief market strategist at Convergex. Given the additional volatility, what can investors expect going into the second half of 2016?

It's a very complex environment because stocks are, historically speaking, "overvalued, and not by a little," he said. But given that interest rates are so incredibly low, that helps to support the current valuation.

While investors may be able to get away with higher valuations, it does diminish returns. Colas explained that instead of seeing those strong years of double-digit gains, it's more likely that investors will see small gains of 3% to 5% annually. While modest gains seem likely this year, they won't come with a lack of volatility, especially with the upcoming presidential election and additional economic factors to get through. 

The market could have several years of these returns moving forward, given that the global economy is stagnant but not faltering, and as interest rates remain low.

Stocks aren't in the typical "if X, then Y" scenario either. As mentioned, stocks have a high valuation, but bond yields are unattractive. There's also the rallying dollar, which hurts multinational stocks, so domestic, small-cap companies should outperform, right? 

Well, not necessarily. Investors realize that the current environment isn't exactly robust. So their willingness to put money into what tends to be riskier assets is limited, Colas reasoned.

So where should investors put money to work? The broader market has seen a recovery, as investors expect a continued accommodative approach from central banks. They also realize the Brexit situation will take years to work out, not days or weeks.

Specifically though, Colas says investors looking for gains could consider technology stocks. Generally speaking, the sector tends to outperform the broader market when it too is moving higher.

Going back to the 1950s, stocks are higher 80% of the time in the second half, if they finish the first half in positive territory. This year, the S&P 500 finished higher by a little more than 2.5%.

So for investors who believe stocks will continue higher, that's one sector they might want to consider, Colas said.

Conversely -- and unfortunately -- the bank stocks will likely continue to struggle. Despite low valuations and impressive stress tests results, the low interest rate environment, along with expectations for that environment to persist, make it hard to find these stocks attractive, he explained.

In any regard, investors can expect returns of 3% to 5% over the next 12 months, and possibly further if the current environment continues, Colas concluded.

This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.

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