2016 Market Prediction Check-In

It’s an early August tradition for me. Around this time every year, I go back and check out how my market and economic predictions for 2016 are doing. Yes, it’s a little past the halfway point of the year. And since the following predictions were published on December 2, 2015, they are more like eight months old… 

Still, I find the predictions business to be a helpful exercise. It’s always good to have a game plan. We’ve talked a lot about how important investors’ expectations are for stock prices. And it’s critical to refer back to your game plan to see how it’s playing out. Because it’s impossible to invest without expectations…

Now, your expectations might be pretty simple, as in: you expect to get paid a certain dividend amount from a company. Or you could make your investment decisions with much more specific expectations, like you expect Apple to sell 53.5 million iPhones in a quarter (to be clear, I have never made iPhone sales predictions, and I made that 53.5 number up).

In both cases, whether or not your predictions come true will have a big impact on what the stock does. If that dividend is less than expected, the stock is likely to sell off. But if it gets bigger, then maybe the stock rallies. Obvious, I know. But the point is that you should make predictions, too. They don’t have to be wacky or really out there. In fact, the more predictions you get you right, the more money you’ll be making if you invest on them. So it pays to keep them a bit reasonable. 

Write your predictions down. Refer back to them. You might be surprised by how well you do. And I can also tell you that you’ll get better over time.

Now, let’s have a look at my predictions for 2016 from December 2, 2015:

1. The S&P 500 will hit 2,275. This one may sound familiar because that was my target for the S&P 500 in 2015. It was based on earnings per share of $127 for the S&P 500. But as we know, 2015 earnings per share are coming in much lower than that, around $109 to $110.

Right now, I’m seeing 2016 earnings per share estimates for the S&P 500 between $119 (Goldman Sachs) and $132 (Standard & Poor’s). As I’ve noted before, estimates are usually around 10% too high, and they get revised lower as the year progresses. So we could reasonably peg earnings at $115 to $120. And that would represent ~10% earnings growth for 2016.

Clearly, my 2,275 target suggests that S&P 500 earnings will be better than $115 to $120…

So far so good. It wasn’t looking good at the start of the year, that’s for sure. And it wasn’t looking good just a couple months ago after the Brexit vote. But that rally has put my target back in play. Frankly, I don’t think the S&P 500 will hit 2,275 this year. I think we have some sideways/down action coming. I do expect that we will end the year on a positive note. But my target was likely a little aggressive. 

2. Oil trades as high as $70 and energy stocks return to profitability. I say 2016 will see oil rally into a new trading range between $55 and $70 and energy stocks are the best performers in the S&P 500 (yeah, you should buy some U.S. oil stocks).

Not looking good. Turns out the Saudis are crazier than I thought. They seem to love losing $100 billion a year from their own stupid strategy. There is no indication that they are about to reel in production. So barring some shock to the oil markets (like a war in the Middle East), oil prices are not going to move much over $50. 

3. Inflation returns. The U.S. labor market is actually getting kind of tight. Wages have shown some incremental improvement. There’s not enough supply in the housing market. And I expect oil and gasoline prices to rally. These all have the potential to push inflation rates up.

The Fed has long wanted to see some inflation come back into the system. 2016 is the year they get it. But I don’t think the Fed will raise rates to fight inflation per se. Rather, the little bit of tightening we get will simply get rates off the floor, say to 1.5% to 2%.

Not looking good. Inflation will pick up at some point. Because the U.S. is near full employment and wages are going to rise. But not enough to make this prediction come true. Energy prices are a drag on inflation, and that doesn’t look like it will change anytime soon. We are not likely to get more than one more rate hike before the end of the year.

4. Gold rally! You just can’t have some inflation without a rally for gold. Look for gold to rally back to the $1,300 level. Just about every gold mining stock will double in price.

Nailed it. The reason gold rallied may not have been exactly right, but who cares? When you predict an entire sector of stocks will double and get it right, it doesn’t matter why. And for the record, I didn’t make this same prediction for 2015. 

5. Emerging markets get no relief (and may get a crisis). This is the one that’s troubling me. I don’t see China’s GDP growth picking up, and that spells trouble for natural resource-based emerging economies.

I’d put the odds at 50/50 that we get some kind of emerging market economic crisis in 2016, similar to what happened to the Asian Tigers in 1997. And like any financial crisis, it will be a very good buying opportunity. 

So far so good. Some emerging markets are doing OK, but many are not. And China certainly isn’t growing at a robust clip. In fact, China’s GDP growth has been consistently below expectations. Debt is still a problem for emerging markets. Investors aren’t worried about it now, but that can change fast.

6. American boots on the ground in the Middle East. At some point, enough of this ISIS crap is going to be enough. I’m not generally a fan of American military intervention, but these lunatics are calling the U.S. to action. I would expect that any military action would actually come under NATO or the UN. But it’s time for our soft talk on ISIS to give way to the big stick.

Nailed it. After a much-heralded “de-escalation” in Iraq, U.S. troops are on the rise. An offensive against ISIS-held Mosul appears to be imminent. I say it’s about time. I’m not a fan of U.S. military intervention, exactly, but ISIS needs to be dealt with, and so does the situation in Syria. 

7. President Hillary. This shouldn’t come as a shock given what the party of Abe Lincoln has come to. It’s a disaster. Ronald Reagan wouldn’t recognize it. Any truly moderate conservative has been run off. And that’s a shame, because American politics works best with two viable parties keeping each other in check.

Jury’s out. I’m tempted to say that I missed this prediction simply because I underestimated Trump. Yeah, I know, so did the entire GOP, but that doesn’t make it any better. I do not have a good read on how this election will play out. 

8. Once again, GDP can’t beat 3.5%. This one shouldn’t come as a surprise and doesn’t need any explanation. Growth just isn’t going to blow the doors off. For the last two years, the first quarter has been horrible, and that’s kept a lid on full-year growth potential. Yeah, it’s always something…

Nailed it. This one is just too easy. First-quarter GDP growth was about 1% (revised up from 0.8%), and second quarter was 1.2%. Ironically, the consumer is strong. It’s businesses that aren’t spending. That’s gonna change, and I bet we see some +2% readings to finish the year. But 3.5% ain’t happening. 

Nailed 3 Out of 8

I nailed three of my eight predictions. Two aren’t going to happen. And another three still have a chance. Really, if just one of those in the “so far so good” category hits, I’ll be batting .500. That’s not bad at all.

Until next time,

Until next time,

Briton Ryle

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A 21-year veteran of the newsletter business, Briton Ryle is the editor of The Wealth Advisory income stock newsletter, with a focus on top-quality dividend growth stocks and REITs. Briton also manages the Real Income Trader advisory service, where his readers take regular cash payouts using a low-risk covered call option strategy. He is also the managing editor of the Wealth Daily e-letter. To learn more about Briton, click here.