Stock Market: Why 2016 Will Be a Terrible Year

Stock MarketThe stock market cannot continue to rally when corporate earnings and revenues are contracting.

For the third quarter of 2015, earnings on the S&P 500 are expected to decline by five percent and revenue is expected to decline by 3.5%. (Source: FactSet, October 23, 2015.)

If these are the final figures, it will be the first time corporate earnings have declined for two consecutive quarters since 2009. And revenue would have declined for three consecutive quarters, something we haven’t seen since 2009 either.

In the second quarter of 2015, corporate earnings declined 0.7% and revenue declined 4.6%. The real decline in corporate earnings is masked by the fact that public companies are spending billions of dollars to buy back their stock, propping up earnings per share.

Technical Analysis Says Stock Market Taking Last Breaths

Looking from a technical point of view, it is my belief that we are in the last stretch of the stock market rally that began in 2009. Please look at the monthly chart of the Dow Jones Industrial Average below and pay attention to the vertical lines drawn.

Over the last two decades, we have seen something interesting on the stock market. On average, the stock market sees a bull run of about 60 months, after which it crashes. This happened between 1995 and 2000; the stock market then declined 30% from its top. After bottoming in 2003, the stock market rose until 2008; then it crashed 50%.

After making a solid bottom in 2009, the stock market is well beyond the 60-month mark. Considering corporate earnings and revenue are contracting, it’s not a matter of whether the stock market will crash, but when. Let’s not forget that over the past couple of years, stock buyback programs have supported stock prices.

Dow Jones Industrial Chart

Chart courtesy of www.StockCharts.com

In the second quarter of this year alone, public companies have purchased $134.4 billion worth of their own shares. Over the trailing 12 months (TTM), they have bought back well over half a trillion dollars worth of shares. Who’s buying? In the second quarter of 2015, 75% of the S&P 500 bought back shares! (Source: FactSet, September 21, 2015.)

My Reason to Remain Skeptical Towards the Stock Market

My concerns about the stock market have been echoed in these pages for a while now. I warned about owning stocks in 2007, at which time I believed we had an extremely overpriced market. I was a big fan of stocks back in 2009 when they were so cheap. However, today, I see stocks overpriced again when measured by many historically proven stock market valuation tools. I believe there is very little upside left for the stock market, if any.

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