Your Guidebook For The 2016 Economy

As you already know, there are no guarantees when it comes to the stock market and investing. The sensitive, responsive, and sometimes unpredictable nature of the markets is what keeps things interesting, however.

Investing can provide many opportunities for growing your wealth. Even though it’s impossible to know in this moment where the stock market will be a year or even a month from now, it’s beneficial to familiarize yourself with what economists and market strategists are predicting. The more knowledge you have, the better equipped you are to make adjustments to your investment strategies.

While some trends and forecasts may not come to fruition, there’s always the possibility that a few or even the majority could play out. Having a general idea of where the markets could be headed can give you a competitive advantage as an investor and increase your chances at better returns.

A Quick Recap Of The Markets In 2015

As the year comes to a close, it’s worth looking back at how things fared over the last 12 months. Overall, the year has been filled with some unexpected events and many asset classes didn’t fare as well as some economists anticipated.

There were four primary contributing factors to the dips in the stock market in 2015:

• Surprising declines in commodity prices, especially oil.
• Strengthening of the U.S. dollar.
• Soft economic growth and devaluation of China’s currency.
• Slower than expected interest rate hike by the Federal Reserve.

Market strategists had predicted a rise in the stock market of about 10 percent or more this year, but as you probably already know that didn’t happen. The below chart displays the year to date performance of the S&P 500 through December 22, 2015. We’re essentially flat for the year.

Source: Yahoo Finance

The dropping of oil prices, which started in July, had a significant impact on the market. Many investors didn’t anticipate the roughly 30 percent decline in oil prices this year because they had already dipped 45 percent last year.

Overall, the energy sector was down 10 percent in 2014 and dropped another 25 percent in 2015. On the contrary, consumer discretionary stocks were top performers in 2015; the sector was up about 7.4 percent.

Here’s a look at other notable events from 2015.

Source: Barron’s

Looking Towards 2016

The wide consensus is GDP growth is likely to run in the 2.5 to 3 percent range for 2016. This is slightly higher than the average growth rate during the first 6.5 years of the financial crisis recovery, which was between 2 and 2.5 percent.

Did you know that about 25 percent of millionaires surveyed by CNBC believe that the S&P 500 will be flat in 2016 while 46 percent predict it could be up between 5 and 10 percent? As for personal rate of returns, the majority of those surveyed anticipate earning a modest 4 to 6 percent next year.

Other interesting finds include more than 60 percent of participants think their household income is likely to stay flat in 2016. A lack of interest in emerging markets and Europe as value plays was also noted.

Other research compiled by Barron’s from 10 prominent market strategists showed that the mean forecast of the S&P 500 index by the end of 2016 is 2,220. That’s 4.2 percent above the all-time high of 2,131 in May 2015.

As far as the fed-funds rate goes, many strategists estimate the rate could climb somewhere between 1 and 1.25 percent by December 2016. Investors are likely to monitor the Fed’s announcements and actions very closely.

Sectors To Watch

Are you curious about which industries could be favorable next year and what investors are interested in? Materials and consumer discretionary investments were the lowest ranked sectors CNBC’s millionaire participants said they are interested in holding.

Conversely, the sectors they are most interested in holding next year include healthcare, technology, and financials. Those surveyed also showed a lot of interest in taking ownership in real estate next year.

It’s possible that an increase in healthcare investing is resulting from wealthy baby boomers having a greater interest in the sector as they age and receive more medical treatments.

Many market strategists have a dim outlook for mining, metals, utilities, energy, and consumer staples. BlackRock chairman Laurence Fink told Bloomberg TV, “I don’t think we’ve seen the bottom of energy.” The upside of low oil prices is that the cost of raw materials, food, and transportation goes down too. That helps improve businesses’ profit margins and encourages more consumers to spend their added disposable income.

Strategists’ suggestions include taking a focus on financials and technology. When interest rates rise, banks tend to perform better because their net interest margins are prone to increase. Financials also have a tendency to be inexpensive in comparison to other sectors, which can be favorable to investors.

Technology stocks are still on the forefront of market strategists picks for 2016 because of their top-line growth and reasonable valuations. Tech stocks often also have high profit margins, strong balance sheets, and tend to perform well in rising interest rate environments.

Another area to watch is homebuilding. Senior economist Gus Faucher at PNC believes, “Homebuilding, especially single-family homebuilding, will remain a key driver of economic growth in 2016. There is a great deal of pent-up demand for housing.”