What's in Store for 2016?

Stock market predictions for the coming year hit the newswires and headlines every December as predictably as the arrival of Santa Claus in the local mall. Although stock market gurus warn against trying to time the market, few can resist the chance to look into the crystal ball. Here’s an overview of what’s percolating in the commentary arena.

More of the Same

Many analysts are forecasting that 2016 will be much the same as 2015, with the market staying positive but not making significant gains. Apart from the dipping and diving in August and September, investors have seen very little in the way of significant market gains or losses in 2015. By the end of November, the Standard & Poor 500 index was showing a year-to-date gain of 1.3 percent. This modest increase mirrors that of the U.S. economy, which is expected to grow by about 2 percent over the next year. On a global level, investment analysts are predicting lackluster economic performance for the European and Chinese markets. Stock valuations in general are expected to stay on the high side. Some investment pros note that buying opportunities exist in certain sectors, and that individual investors might want to rebalance their portfolios in light of the poor performance of energy companies (following the descent of oil prices), and the fact that economic recovery in Europe and Asia predominately lags behind the U.S. economic rebound.

The Wild Card

Like a broken record, predictions about the Fed’s long-anticipated increase in interest rates continue as 2015 draws to a close. Having been consistently wrong in predicting increases throughout 2015, now investment analysts are forecasting higher interest rates in 2016. A few were still looking for a December rate hike, but geopolitical concerns including the downing of a Russian jet near the Syrian border and Europe’s burgeoning refugee crisis combine to make this unlikely. The Fed’s quantitive easing program – which has kept rates near zero for nine years to help spur economic growth – has done its job. Ironically, some commentators who worried about the possible effect of interest rate increases on stock prices are now expressing concern that failure to raise rates is creating market anxiety. They believe further delays by the Fed could cause U.S. investors to second-guess the real strength of the nation’s economic revival.

Interest Rates

Opinions may vary as to the timing, but there does seem to be some broad agreement on the good and not-so-good effects of increased interest rates.

• People who have saved money in bank CDs and money markets will benefit from better returns (after suffering negligible gains for some nine years). Not surprisingly, consumers (including home buyers) and businesses will pay more interest on loans. Likewise, companies with strong balance sheets and consistent earnings should withstand any changes better than those whose finances are not so solid.
• Some stock sectors will benefit from interest rate increases – notably banking and financial institutions. Whereas some – like real estate investment trusts – usually suffer when credit becomes more costly.

Whatever the new year brings, investment gurus stress the need for long-term commitment and periodic reviews of portfolio performance.

The comments above are general in nature and are not intended to replace specific advice from your expert tax and investment advisors.

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