Market Forecast: Yes, No, Maybe By Lewis J. Walker, CFP(R)

With many U.S. stock market averages negative for 2015, the question du jour is, “Will the stock market be up or down in 2016?” The most accurate answer is, “yes, no, maybe...”

‘Tis the season for pundits to publish “hits and misses” relative to last year’s predictions. Columnist Harvey Earl Wilson (1907-1987) observed, “An economist is an expert who will know tomorrow why the things he predicted yesterday didn’t happen.” Sharing my suspicion that there is no certainty when it comes to forecasting, the inscrutable economist John Kenneth Galbraith (1908-2006) said, “The only function of economic forecasting is to make astrology look respectable.”

We know why many of the forecasts for a positive stock market outcome in 2015 didn’t pan out. The Dow Jones Industrial Average (Dow) and S&P 500 Index hit all-time highs in May, 2015. Worries about slowing growth in China, falling oil and commodity prices, a strong dollar diminishing exporter profits, and the prospect of rising U.S. interest rates, precipitated selling in August, taking equity indexes down sharply. September saw an impressive rebound back toward May highs. But from there a see-saw pattern, and at year end Santa Claus showed up sans a rally, delivering instead a highly-discounted lump of coal (“fossil fuel...bah, humbug,” proclaimed Paris climate conferees). The Dow and S&P 500 finished the year down -2.2% and -0.7% respectively. The tech-heavy Nasdaq Composite Index was up +5.7%. Hedge funds declined by 3% on average.

We begin 2016 with unsettling forces creating a foggy funk in investor’s psyches. The election cycle is heating up, with attacks on the left against capitalism, the lifeblood of the stock market. The leading candidate on the right declares everything to be “a disaster,” leaders and opposition “stupid.” Jihadist violence and refugee swarms in Europe and on our southern borders disturb. With the factors cited above that caused the August swoon still in play, angst greeted the new year along with headlines like “Stocks Post Worst Year Since 2008.” (The Wall Street Journal, 1/2/16)

But dive deeper. European stocks generally did okay, but investors expected more, especially with the European central bank initiating easy money policies much as we did in 2009 in response to 2008. Yes, key U.S. averages were down, but not by that much. WSJ writers Erik Holm and Paul Vigna pointed out that the benchmark S&P 500 Index posted “one of the smallest full-year moves in its history.” (1/2/16). Four times in the past the index closed a year changed by 1% or less. In all but one year of close finishes, the index the following year was up by double-digits or more. The exception was 1947, and in 1948 the market was again down by a hair. In 1949, the index jumped +10%. Holm and Vigna noted that the Dow, too, “was higher in four of the five years following its narrowest closes.”

In 1947-1948 the Cold War was raging, midst growing tensions with the Soviet Union, the Berlin blockade, and fears of spreading Communism. President Harry S. Truman initiated the second peacetime military draft in response. Truman also ended racial segregation in the armed forces as Jim Crow laws heightened racial friction. In 1948 incumbent Democrat Truman defeated Republican Thomas Dewey and Dixiecrat Strom Thurmond. The market rallied in 1949 after a post-WW II malaise. The point? There are always things to worry about but America continues to grow and progress is ongoing despite the fog of worries du jour.

Regulators compel advisers to remind you that past performance does not guarantee future performance. You will see pundits proclaim that currently negatives outweigh positives. Yet, inflation still is contained, the Fed constrained with interest rate hikes likely to be modest, oil and commodity prices could bottom and stage hopeful but restrained recoveries, and China will continue to grow without the runaway excesses of the past. Midst doubt and pessimism, any positive news could surprise on the upside; 2016 is not 2008 revisited! “Irrational exuberance” is nowhere to be seen. Caution generally is good for equity markets in the longer run.

Continue to build savings, earning power, and your overall investment pool. If retired, you still need to defend your stash against taxes, your largest drain, and inflation, however, modest it may be. As Woody Allen famously advised, “Money is better than poverty, if only for financial reasons.” Happy New Year!

Lewis Walker is President of Walker Capital Management, LLC. Securities and advisory services offered through The Strategic Financial Alliance, Inc. (SFA). Lewis Walker is a registered representative and investment adviser representative of SFA which is otherwise unaffiliated with Walker Capital Management, LLC.

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