A look ahead to 2016: One strategist’s call
If you’re a forward-looking investor, it’s time to look ahead to 2016. So what should you expect from U.S. stocks next year after an up-and down 2015 that has led to a sideways market with little to no headway?
David Joy, chief market strategist at Ameriprise Financial, weighed in on 2016 in a client report. He says there are a few “important variables” that will determine if stocks go up -- or down -- next year.
He cites Federal Reserve rate hikes (and monetary easing by foreign central banks), the performance of the dollar and China’s economy as three keys.
“First, it remains to be seen at what pace the Fed will raise rates,” Joy wrote. “The Fed itself anticipates perhaps four additional quarter-point increases in 2016. The market thinks fewer, perhaps two or three.” The Fed, of course, raised short-term interest rates last week for the first time in nearly a decade.
Second, “how the dollar responds (to) the path of foreign central bank activity will be critically important for commodity prices, manufacturing, emerging market performance and inflation expectations,” Joy argues. A rising dollar this year crimped profits of U.S. multinationals, as a more expensive greenback makes U.S. products more expensive abroad and also reduces foreign profits when they are brought back to the U.S.
Finally, “China is again talking about injecting (more) stimulus to shore up its flagging economy,” he adds. “If it follows through, and there’s tangible evidence of a positive result, concerns over the Fed’s impact on developing economies will lessen. At some point the energy sector will stabilize.” A big story in 2015 was the slowdown in the economy of China, the world's second-biggest economy.
On the plus side, although 2016 U.S. earnings expectations have come down, they so far remain positive — “something that can’t be said for 2015,” Joy said. Earnings for the broad Standard & Poor's 500 stock index were basically flat this year, weighing on stock prices and valuations.