Why 2016 Won’t Be A Good Year For The Stock Market!
- Revenues have stalled
- Earnings have struggled
- Interest rates are going up!
In 2015 I was very clear at all our club meetings and communications that stocks were fully valued and that the strength of the US dollar had a negative impact on company earnings. At best, I expected the market to trade sideways for the year. That is exactly what did occur.
You might recall that at one meeting in May, internationally known trader Phil Town and I discussed this situation in detail. We guided investors to take profits and go into a heavier cash position. In 2016 my guidance is similar but I believe the potential of a significant correction is very possible..
The good news is that I don’t see a recession in America in 2016. However, the economic growth around China, Brazil, Russia, Europe, and most other nations remains weak. This means less demand for US exports. This slowed demand for US goods, combined with the strong dollar and coupled with weak international growth will continue to mute earnings growth in 2016.
Interest Rates Will Rise in 2016 – The Question is How Fast?
The Federal Reserve has lifted the cap on interest rates and although I don’t expect the Fed to take an aggressive stance, the impact of higher rates will hurt bond prices and mutual fund portfolios. That will be bad for your 401k!
I don’t see inflation as a problem in 2016. However, if inflation does rip through the US market, the expected impact would be for the Fed to raise interest rates much quicker than anticipated. Higher interest rates would have dire consequences for both the stock market and the real estate market.
Market Maneuvering Margins Are Minimal
As I see it, this is the problem we are facing: Even if the market were growing at a strong pace, the S&P 500 stocks are still not cheap in relation to their earnings. This leaves little maneuvering room. Any economic headwind will cause a stock market sell-off. Bottom line is stocks are overvalued as of this date January 1st, 2016.
That is why in 2016 I would reduce all exposure to the stock market to about two-percent of your net worth. I suggest buying stocks on substantial sell-offs when they begin to show value relative to the sales price.
Do not listen to your financial advisor when they tell you to be “long” in the market. It is in their own interest to keep you in the market in order to protect their fees. Right now the market is a gamble and not worth the risk.
I see little room for upside movement when the S&P 500 is trading at 17.2 times its earnings over the last 12 months. This is much higher than the 14.5 ratio we’ve seen over the last decade. With stock prices this high there is little room left for them to rise unless we see substantial economic growth or a huge market sell-off. At this time I am on the sidelines.
Dips Are One Thing – A Steady Downside Is Something Else
I have another area of concern, too. The majority of mutual funds continue to underperform the market. Mutual funds are a favorite of financial advisors, yet for the most part your advisor is not your friend. Over time the fees charged by your advisor will erode the accumulated gains you could attain by over 50%. My feedback is in most cases a financial advisor is a bad investment and moving in the wrong direction.
All the government’s regulatory involvement has made things even worse. It has gotten to the point where most financial advisors are simply glorified mutual fund salespeople due to their limitations on what they can and cannot do.
So, my guidance for 2016 is that we are looking at a year likely to trade downward. Couple that with the financial fees you are paying in your 401k or mutual funds, and 2016 could take you one step closer to the poor house. Investors relying on financial advisors need to look hard at this combination and make some smart decisions. I suggest attending Las Vegas Investment Club Meetings and take on more personal accountability for your financial affairs.
Many people are surprised that lower oil prices sometimes have a negative impact on the stock market. The logic is lower gasoline prices means more money for consumers to be able to spend elsewhere and a stronger consumer. After all consumers make up about 75% of US GDP and more spending by consumers drives up stock market values. However, there is another factor at play that is offsetting any potential stock market gain.
As of the date of this article oil is near $40 and likely in my opinion headed lower. Much lower oil prices cause sovereign wealth funds that are from oil producing states to sell off their portfolios to meet their budgetary needs domestically. This has an impact on all equities worldwide as these funds sell off their equities and other securities.
The level of sovereign wealth fund assets under management as of December 31, 2015 is $7.2 trillion, with $4.4 trillion originating in commodity and oil rich nations. These oil dependent nations like Saudi Arabia have to repatriate the capital from the sovereign wealth funds having a negative impact on stock markets worldwide.
No One Cares About Your Money More Than You Do
If you haven’t already done so, it is time to stop relying on others to manage your money!
I believe that the only investors, who will do well in the stock market in 2016, are investors capable of making individual stock picks without having to pay financial advisor fees. I freely admit that this is a high risk game for most people. That’s because most people are not equipped with the skills needed to do due diligence and objectively assess the risks and rewards.
All I can tell you is that you are not going to do well if you only listen to a financial advisor. Their standard policy is to tell you, “You are in this for the long term and need to ride out the dips in the market.” That makes money for the financial advisor, the bank or brokerage house but not you!
Dips are one thing, but I foresee something more than a dip. If you get such advice from your advisor then seriously consider firing them. It doesn’t matter how long you’ve known them, how much money they’ve made for you in the past. Staying in for the long term is not good advice in today’s market. You must remember that your financial advisor’s best interest is in their own pocketbook, not yours. Yes I have said this many times already but I hope it is sinking in!!!