Merrill Lynch Has 6 Crucial Key Investment Themes for 2016

Needless to say, 2016 has already started off in record fashion, and not in a good way. The massive decline to start the year is the biggest one on record and has left investors very nervous, and with good reason. A cauldron of China imploding, oil collapsing, Middle East tension levels rising to new heights, and an overall malaise when it comes to stocks have produced a horrible first half of January.

Despite all the perceived negatives, which are amplified when the financial media drags out perpetually bearish commentators, the reality is that while things are tense, the investing world we know it doesn’t end tomorrow. Job growth is accelerating in the United States and low energy prices should help to fuel consumer spending, which is 70% of gross domestic product.

In a new research piece from Michael Hartnett, the outstanding chief investment strategist at Merrill Lynch, he outlines six top investment themes that he feels could be the trends to watch for 2016.

1. Bye-Bye QE:  The era of worldwide quantitative easing soon may be coming to an end. While it has been over in the United States for some time, it may start to wind down in Europe as well. Many strategists, Harnett included, seem to feel that the United States and the S&P 500 may be a better vehicle for growth investors this year.

2. Oil Age: Is this the end of the oil age? While oil, natural gas and gasoline will of course still be required around the globe, the question is will technology prevent meaningful recovery in the sector. The trades here for investors are what Merrill Lynch calls “best of breed” U.S. energy stocks. ConocoPhillips Inc. (NYSE: COP) and Exxon Mobil Corporation (NYSE: XOM) both fit that profile, and are both rated Buy at Merrill Lynch.

3. Black Dragon: With China de-pegging its currency from the U.S. dollar, we could be in for a new era of volatility across multiple asset classes. While some on Wall Street make the case that removing the peg is good, the ensuing volatility, at least on a short-term basis, can ratchet up. Hartnett refers to this scenario as the “Black Dragon.”

4. Recession Reset: While the risk of a recession looks doubtful, at least at this juncture, the case is made, and correctly so perhaps, that asset prices are not pricing in the possibility. Until Purchasing Managers Index (PMI) numbers start to trend above 50 again (which indicates growth and expansion) in China and the United States, the risk of a recessionary scenario does indeed remain in place. One investment idea put forth is to buy one-year puts on the very crowded FANG stocks.

5. The Late Show: The case is made that we are near the end of the investment cycle, which also has merit. The market bottomed in March of 2009 with an ominous intra-day print of 666 on the S&P 500. Despite the current turmoil, we are still at 1,939 on the index, a massive run over the past almost seven years. The combined U.S. macro, Federal Reserve tightening, junk bond bear market, narrow market breadth and overall market damage hint that we are near the end. Any weakness in growth could draw fiscal policy changes. That said, there are few arrows in the policy-makers’ quiver to use.

6. Cybergeddon: The Merrill Lynch investment suggestions are skewed to what the firm terms the “transforming world investment theme” for 2016. Cybersecurity is cited as one of the top investment ideas. Internet of Things, virtual reality, artificial intelligence and other areas of changing technology also seemingly would fit the bill.

The bottom line is the past seven years has been an outstanding market run. All those incredible gains need to be consolidated, one way or another. It could come in the form of a market crash and a resulting bear market, or it could simply mean multiple years of sideways trading. One thing is for sure, true economic growth in the United States is needed to push wages and produce the kind of inflation the Fed is looking for. It may take a new administration in November that moves away from big government and focuses more on business, the economy and real job growth.