Every year, I like to keep track of the predictions that “gurus” and other market observers make for the upcoming year, specifically the ones that they say are “sure things.” It seems like no one in the financial media holds them accountable (which is a shame, since the evidence shows there are no good forecasters), so I will. Today we’ll look at the common predictions for 2016 that I’ve been hearing, from “gurus” and investors alike.
Our first sure thing is that the Federal Reserve will continue to raise interest rates in 2016. That frequently leads to the recommendation that investors limit bond holdings to the shortest maturities.
The second sure thing is that economic growth, while remaining relatively tepid, will improve. The Federal Reserve Bank of Philadelphia’s fourth quarter 2015 Survey of Professional Forecasters predicts unremarkable real GDP growth of 2.6% in 2016, up from their final forecast of 2.4% in real GDP growth for 2015.
Our third sure thing follows from the first two. With the Fed’s tightening and the economy improving—and with the economies of European and other developed nations still struggling to generate any growth, and with their central banks still engaged in very easy monetary policies—the dollar will strengthen. The dollar index ended last year at 98.69.
The fourth sure thing is that with the cyclically adjusted price-to-earnings ratio at 25.9 as we entered the year, almost 60% above its long-term average, U.S. stocks are overvalued, and thus should be avoided in 2016.
The fifth sure thing is that, given relative valuations, U.S. small-cap stocks will underperform U.S. large-cap stocks. Morningstar data showed that, near the end of 2015, the price-to-earnings (P/E) ratio of Vanguard’s Small Cap Index Fund (NAESX) stood at about 20.6, while the P/E of its Vanguard 500 Index Fund (VFINX) stood at roughly 18.5.
The sixth sure thing is that with the non-U.S. developed and emerging market economies generally growing at a much slower pace than the U.S. economy—and with many emerging markets hurt by failing commodity prices, slower growth in the Chinese economy, the Fed tightening monetary policy and a rising dollar—international stocks will underperform U.S. stocks this year.
The seventh sure thing is that after defying the gurus in 2015, the volatility of the market will rise in 2016. The VIX ended 2015 at 18.2.
Since 1896, the first three quarters of the last year of the presidential cycle have all produced below-average returns, although the fourth quarter of that year has produced above-average (almost 5%) returns. Thus, our eighth sure thing is that the first nine months of the year will be disappointing, but we’ll be bailed out by a strong fourth quarter.
That’s our list. Keep in mind that, if they are “sure things,” most (if not all) should happen. We’ll report back to you with a score at the end of each quarter.
Larry Swedroe is the director of research for The BAM Alliance, a community of more than 140 independent registered investment advisors throughout the country.