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2016 Outlook

Wealth Management Services for
Today’s Investor. 
Welcome to Virtus Wealth Management.

Now that 2016 is upon us, your Virtus Wealth Management Team would like to wish you a happy and prosperous New Year. 2015 was a year with few surprises but the one that did come was a doozy. If you recall, I forecasted in our 2015 Outlook (dated January 31, 2015), that the market would top in April of 2015, see the normal summer months volatility and then rebound to slightly positive returns (mid-single digits) by the end of the year. I was on track…then oil prices crashed. Not only did that impact the stock market but the bond market as well as high yields and floating rate bonds ended the year negatively also. We were close, but no cigar, on the forecast as the markets were basically down slightly for the year. As I look out to 2016, we have moved from “reaching the peak but not there” in 2014 to “times, they are a changing” in 2015, to our 2016 forecast, “fasten your seat belts”. Following is our 2016 outlook:

Domestic Equities

Last year our theme was “times, they are a changing”. This is the year we move to “Fasten Your Seat Belt.” To be clear and to address this early, we are not forecasting huge losses this year. However, we are projecting even more volatility, and if there is a huge swing, bigger losses are more likely than big gains. It is all about “driving carefully” and watching for the potholes. We expect earnings to expand again in 2016 after stalling in 2015. S&P 500 earnings will be minimal as we think current projections by Wall Street are too high. We posted our concerns about valuation last year and it still remains a red flag this year. It is not that the markets are extremely overvalued, but rather valuations are putting a cap on the upside potential even if earnings match bullish expectations. The Shiller PE Ratio has ranged from approximately 24 to 26 over the past year, putting it on the high level. The Shiller P/E ratio is different in that it looks at earnings, inflation adjusted, over a prior 10 year rolling period in order to incorporate multiple business cycles. However, as long as interest rates stay low, the market can maintain and even grow in times of above average valuations. We believe the focus should be on earnings and interest rates but realizing valuations may put a cap on the upside.

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