Big Threats Lurk in the Stock Market Outlook for 2016
A word of caution: my stock market outlook for 2016 says one thing only—you need to protect yourself!
Not only has the market already gone up; on the back of mediocre business conditions, it really hasn’t had a large sustained correction for years.
Sure, stocks went down in 2011 for a good six months. But going against the Fed at that time was unrealistic with such a massive monetary force to be reckoned with.
Now cycles are changing. And this is still very much a slow-growth world. Recession in 2016 in the U.S. economy is certainly possible, but it doesn’t seem imminent. Growth abroad, however, remains anemic.
As an investor, it’s important to distinguish cycles between the Main Street economy and the performance of the equity market.
Here is a long-term chart of the S&P 500 Index:
Chart courtesy of www.StockCharts.com
Stocks have already gone up in anticipation of economic recovery. But they can still tick higher in the face of rising interest rates.
Making predictions is, of course, just guesswork. My most important guide for how the stock market might turn out in 2016 lies in corporate outlooks and financial results. Generally, a lot of big-cap, brand-name companies expect sales growth and earnings growth to improve at a faster rate than they did in 2015.
Corporate balance sheets are still in very good condition, while the cost of capital (debt financing) is still very low. That’s a big worry for the stock market out in 2016.
This means that there’s plenty of corporate cash available to keep shareholders happy in the form of rising dividends and share repurchases. This remains a net positive for stocks.
With rising short-term interest rates, it’s reasonable to call for falling share prices.
But, with sales and earnings growth expected to improve (modestly) even in the face of U.S. dollar strength, my best guess for 2016 given current information is another choppy, perhaps flat year for stocks. This is most likely to be the case as share prices continue to try to balance themselves out after such strong index gains.
I’m actually more worried about 2017. Coming down the pipe, there is good potential for increased price inflation—and faster interest rate increases to deal with it.
This is why it’s so important to reevaluate your investment risk now, with a new interest rate cycle at its beginning.
While corporate earnings are managed to suit the Wall Street machine, a number of Dow components are calling for low single-digit comparable growth in revenues, with high single-digit growth in earnings for 2016.
Combined with dividends, this should produce a better corporate performance than what occurred in 2015.
The Bottom Line on this Stock Market
I think the stock market can quite easily deal with several quarter-point rate increases over the next 12 months.
My biggest worry in my stock market outlook for 2016 is price inflation. It’s a short-term positive for corporations (and investors). But with the massive monetary experiment recently experienced, it’s a big unruly bear hiding around the corner.
What’s really important now is portfolio allocation and quality as institutional investors (the driver of share prices) keep looking for earnings predictability.
Up next, I’ll present “my top 10 dividend-paying stocks for 2016.”