Cautious optimism was a key word for stock markets entering 2015, as economists were expecting the bull market to continue, but were concerned by the effect of an "imminent" interest rate by the Federal Reserve. Twelve months later, the rate hike finally happened, and the markets have changed very little for the year.
The S&P 500 closed 2014 at 2058.90, and is nearly flat at 2078.36. Similarly, the Dow Jones Industrial Index ended 2014 at 17,823.07 and is currently positioned at 17,720.98. The NASDAQ has shown some growth, moving from 4736 to 5107.94.
Will 2016 be the year that the market breaks through barriers and shows increased growth, or will the economy stay flat with minimal growth? Worse still, could we finally see a bear market? As usual, you can find a range of optimistic and pessimistic outlooks along Wall Street — but the consensus appears to favor relatively small growth, if not a flat market.
Using the S&P 500 as an example, year-end targets for 2016 issued by many of the major Wall Street firms range from 2100 to 2300. Year-end targets for 2015 ranged from ... drum roll please ... 2100 to 2325. That sounds like a flat market to us.
Many of the firms are packaging this forecast as optimistically as possible. Morgan Stanley refers to 2016 as "a mid-expansion period" similar to 2015 and not the end of the bull market. BMO Capital Markets believes that the S&P will suffer a slight loss; they call this current phase a "secular bull market," but expect the longer-term future for stocks to be bright. RBC Capital Markets, the most optimistic of the group at a 2,300 S&P target for 2016, cites "stabilizing commodity prices" along with measured increases in interest rates and dollar strength as reasons for a "substantially higher earnings trajectory."
Representing the less optimistic view, we have Credit Suisse who says the U.S. is at the "later stages of the equity bull market." Both UBS and Credit Suisse expect high market volatility. Goldman Sachs expects that the S&P 500 "will tread water for a second consecutive year."
It is hard to envision anything greater than a flat market because there is no obvious path to larger scale growth. Equities are slightly overvalued already, and companies have been increasingly resorting to stock buybacks and mergers to keep their stock prices high. Earnings per share (EPS) estimates for the S&P 500 in 2016 are around $120 on the pessimistic side to $125 to $128 on the optimistic side, representing modest growth at best. Neither domestic nor worldwide demand is expected to pick up the slack.
The strength of the U.S. dollar also plays a role. The upcoming interest rate hike by the Fed should make the dollar even stronger, depressing exports. Companies cannot count on worldwide demand, and U.S. wages have not grown enough to expect larger domestic demand.
Flat growth or slow steady growth is not the most desirable forecasts, but in times of low inflation, the effects are minimized. Before you go searching for higher returns, make sure that you keep your risk tolerance in mind and your long-term goals in balance. Do not disrupt a solid buy-and-hold strategy out of impatience for higher returns.