The year 2016 is many things. It’s the United States’ 58th presidential election year, tossing the executive leadership once again into the air and potentially shifting the balance of the federal government. It is the year that Russia and Europe send a probe to Mars to measure atmospheric gas for energy and extraterrestrial expansion. It is the year that America, England, and Australia fully withdraw from Afghanistan.
It is a year of change both subtle and rude. In 2016, we can expect some inflation. The U.S. labor market is tightening. Wages have shown some incremental improvement, there's not enough supply in the housing market, and oil and gasoline prices will rally. These all have the potential to push inflation rates up. The Fed won’t raise rates to fight inflation per se, but with minor intervention will get rates up to 1.5% to 2%.
Growth will be conservative. The U.S. GDP won’t beat 3.5% and China’s GDP won’t see much growth either. The U.S. dollar will remain strong, and the investment climate will reflect it.
In this report, the staff of Wealth Daily looks at how these factors will affect different investments.
The S&P 500 had a rather bland 2015, with some major negative dips in the early part of the year that were reversed toward year’s end. The five-year long bull run appeared to have stalled as the index hit its high point of 2,128 in the summer.
In 2016, we have a target of 2,275 with earnings at $115 to $120. Typically, earnings estimates are 10% too high and get lowered through the course of the year, so this estimate is a bit more conservative than those from Goldman Sachs and Standard and Poor’s. It represents ~10% earnings growth for the year.
Energy stocks were a huge drag on the market in 2015. The sector singlehandedly lowered S&P earnings per share by more than 10%. Despite this, we expect 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.
In 2016 you should buy at least a few U.S. oil stocks.
The Saudi market share "experiment" has been nothing but a loss of around $100 billion a year in oil revenue. They have already sold bonds to make up budget shortfalls, and the IMF says they will be broke in five years if they stay on the current path. Think domestic.
In December 2015, total output was expected to fall to 118,000 bbls/d, the largest monthly decline on record. Domestic production averaged 9.3 million barrels per day in 2015, and in 2016 it will fall to 8.8 million.
Roughly 54% of oil output in the United States comes from six major sites. Nearly five out of every 10 barrels extracted within the United States comes from either the Bakken shale formation, the Eagle Ford, or the Permian Basin. The latter of these is the only one where we expect growth in the year.
There are two main reasons to own gold: first, as a hedge against money depreciation and global instability and second as a vehicle to profits.
Gold ETFs and miner stocks are a relatively simple investment and conservative portfolios should have approximately 20% of their assets in gold and gold-related investments. This will hold true in 2016 as well as any other year, but considerations must also be made if looking for profits.
Central banks paring down their gold reserves contributed to a gold bear market in the 1980s and 1990s. It seemed that the big players were more likely to be selling than buying. We have seen the winds change over the last decade, as the Chinese central bank continued its accumulation of gold reserves.
Through the downturn of 2008, gold fell alongside the economy, but in the recent market correction, it acted independently of the economy and stayed level. It has proven to be a stable buy.
For profit, investors should expect the price to range from $1,000 to $1,300 per ounce in 2016. Buy near the bottom, and sell near the top. 2016 is not going to be the year that gold hits a new high, it will instead be a precursor to a bull run in the next year. This means gold bought near the $1,000 target will be a short-term hold and the most desirable stocks will be gold miners, which will all likely double in price over the course of the year.
In the last 40 years, silver has had two big bull runs, which were padded on either side by much bigger bear markets. In the late 1970s, silver skyrocketed in price. It topped out at almost $50 per ounce briefly in early 1980. Following that, there was a 20-year bear market. Then the 21st century brought some renewed hope to silver bulls. In 2011, the price went up almost to its 1981 high, but came back down and now sits around $14 per ounce.
Silver is more sensitive to the economy than gold, especially when price inflation is low. At the end of 2015 and into 2016, price inflation, as dictated by the consumer price index, has been relatively low. The economy has been improving, but it could always be better.
With a strong dollar, the Fed rate hike, and other overarching economic factors, the market is portending downward motion. If the market continues to weaken, the weakness in silver is likely to continue. Silver is not a strong investment in 2016.
Investors looking for stability should concentrate instead on gold, which also correlates to market conditions, but to a lesser degree.
Twenty-three states plus the District of Columbia have some sort of marijuana legalization in place. In 2016, it will be more than half the nation.
Outside of the U.S., Canada is on the cusp of legalizing marijuana throughout the entire country. This will be a key to marijuana investing in 2016. Companies that are already operational in the medical marijuana space and are actively generating revenue in Canada are key targets for the year.
In the United States, the “edibles” market is where lots of growth is taking place. This industry covers all the foodstuffs, beverages, and other consumables infused with legal marijuana. In Colorado alone, consumers bought 5.8 million marijuana-infused edibles and concentrate products in 2014, and in 2015 a single specialty edibles company scored a $1.25 million seed round of funding.
Companies to watch in this space in 2016 include Kaya Holdings (OTCBB: KAYS), GW Pharmaceuticals (NASDAQ: GWPH), Aphria, Inc. (TSX-V: APH), and INSYS Therapeutics (NASDAQ: INSY).
This industry has lots of room to grow and mature, and it’s still early enough to get in on the ground floor.
The complicated nature of the conflict in the Middle East could affect all of these areas, or none of them. Likewise, economic issues in China or continued growth in India could push investments in either direction. Shifting political power, unexpected crises, and legal issues can change matters even further.
It’s best for the individual investor to stay alert and stay prepared.