Market Targets from January 2015

As a reminder, here were the 2015 S&P 500 targets which we presented a year ago.

The average forecast predicted a rate of return of about 7.1%, with the S&P starting a 2058 and moving to a predicted average of 2205.  The closing value of the S&P 500 in 2015 was actually 2043; thus, the actual price return was -0.7%.  Once you factor in dividend payments, the total annual return of the S&P 500 was 1.38%. 

Revisiting 2015:  Much ado about nothing

Large cap US equities didn’t make a lot of money in 2015, but it was clearly worse year for small and mid caps, which were more clearly negative, ranging from -2% to -5%.  The bond markets were a bright spot in comparison.  Shorter term, investment grade level bonds were the best value, generating small positive returns (0%-2%, depending on the exact index) while long duration and high yielding bonds lost value, losing about 4% in 2015.  Despite some high profile individual winners (Amazon, Netflix, Disney, Facebook), cash, at 0%, was actually one of the best places to invest in 2015.   With no good places to hide, CNN notes that 70% of investors lost money in the year.  So, what went wrong?  Analysts were predicting a good year for the markets – with a healthy, long term average of 7% - instead of the flat-to-negative returns of the year. 

The analysts had good reasons to be moderately optimistic about the US economy.  Much of the good news trends of 2014 did materialize throughout 2015.  Hiring remains steady, despite cyclical reduction in labor force rate.  Therefore, the unemployment made steady progress to 5% - the best it has been in 7 years and it also coincides with the “full employment” level targets.  Costs and inflation remain contained while hourly wages and take-home net pay improved for the average consumer.  All in all, 2015 was a good year – a stabilizing year with the rebuilding potential realized - for the real world US economy. 

The analysts were able to predict some of the macroeconomic trends which had affected 2015, since they had first materialized in 2014.  The dollar strengthened 9.3% relative to other currencies during 2015 which made US exports more expensive.  However, this was a widely assumed outcome following the long anticipated Federal Reserve rate increase.  The inevitable tightening of monetary policy had been expected for months and, if anything, was delayed too long.  Moreover, the weakness in 2015 energy sector revenues accounted for markedly lower quarterly earnings, but the overall benefit to energy consumers should offset this damage in the long run.  In investing parlance, the earnings (E) are lower, but buying stocks at higher Price/Earnings multiple is justified by lower costs for the company.[RS1]   The weakness in oil prices and related stories (the failure of OPEC to restrain supply, Iran’s oil sanctions ending) solidified the 2014 trend, but the sharpest changes in energy prices had already happened by the first half of 2015.

2014 exhibited many of these real world economic factors, but the market results were much better.  In our estimation, the valuations set by the market advances of 2014 were realized and justified by the US real world economy of 2015.  However, the markets are forward looking. The aggregated expectations of investors are less optimistic for 2016.  Why?  What changed?

What the analysts did not know, and did not factor on, was greater fundamental weakness in overseas growth.  Developed markets were slightly negative in 2015.  Developed markets can be roughly split into two camps:  commodity and energy producers (like Australia and Canada) and consumers (Japan, the Eurozone).  The strengthening dollar and weakness in oil prices was clearly going to cause a headache for the producers.  However, analysts did not anticipate the self imposed gunshot wound of the Greek population against their own self-interest, and the mild panic across the latest, Eurozone crisis. 

Emerging market equities were the worst performers in 2015 (down as much as -17%, depending on the specific index) and this poor result weighed on global market returns.  Regarding Emerging Markets, analysts knew that there was potential weakness in the vanguard players, the so called BRIC (Brazil, Russia, India and China) countries.  They speculated upon the overextension of the Chinese government’s ability to spend on infrastructure at the expense of verifiable earnings.  However, since emerging markets tend to advance through greater levels of sophistication in the world economy by providing goods and services to their more developed neighbors, the compounded weakness in earnings and reduction of overly optimistic growth rates hurt them deeply.   

The Updated Market Targets for 2016

2015 is in the books.  It seems as if the flat-to-negative returns of the prior year have chastened some analysts into lowering their predictions for 2016.  However, the results are thoroughly mixed given several analysts are keeping their 2015 prediction as their 2016 target, while some have slightly increased their target.

Caveats aside, here are the new 2016 S&P 500 targets.

Source:  Dow Jones Market Watch, Barron’s