After a year of ups and downs, the S&P 500 (SPX) is registering a decline of nearly 2% heading into year-end. That adds a little tension to the calendar flip for Wall Street’s bulls. What lies ahead for long-term stock investors—many of whom are showing the strain of a volatile 2015—and for shorter-term traders who typically crave this kind of action?
If the SPX recovers, its bull cycle will mark a seventh birthday in March 2016. "It's the little engine that could," says JJ Kinahan, chief market strategist at TD Ameritrade. "I wouldn't look for a rip-roaring market in 2016, but as long as we see earnings growth, we might see tepid stock increases."
And the three drivers that are most likely to set that course?
- Earnings outlook
- Presidential election
- Increased volatility
Wall Street is generally optimistic on the earnings outlook for 2016. The SPX is forecast to post 8% growth in earnings per share (EPS) in 2016, according to S&P Capital IQ.
"Double-digit gains are forecast for consumer discretionary, financials, and the materials sector," says Sam Stovall, managing director at S&P Capital IQ. "The only earnings decline expected is for the energy sector [driven lower by sub-$40 crude], which continues to be a major drag on S&P 500 earnings."
Based on the projected 8% rise in EPS and the still-moderate inflation outlook, S&P Capital IQ projects a 12-month target for the S&P 500 at 2250.
TD Ameritrade clients can stay on top of the year’s earnings reporting rounds with a calendar that offers release information and estimates (figure 1).
It’s Election Year
As presidential debates continue to heat up nighttime television, the race for the White House is likely to come into full focus in 2016.
"As of now, it’s hard to get your arms around who will be in the White House, and there are a lot of questions. Will there be more gridlock with Congress?" notes Kinahan. The perceived change in business-focused policies and the uncertainty that surrounds the election could result in a potential slowing of the economy, Kinahan warns.
Historically, Wall Street’s numbers are generally positive for election years. Since 1948, the S&P 500 gained an average 6.1% during the fourth year of the presidential election cycle and rose in price 76% of the time, according to S&P Capital IQ data.
Brace for Higher Volatility?
Increased volatility has been the norm in recent months, and historical evidence suggests that could continue into 2016. One volatility-driving factor has been the market’s attempt to guess the scope and aggressiveness of Federal Reserve interest rate hikes after the central bank broke the seal in December with its first hike in nearly a decade.
The CBOE Volatility Index (VIX) may hover around the psychologically significant “20” line or higher in 2016, Kinahan suggests, drawing from where the VIX currently sits. Traders should also brace for a potential continuation of the large intraday moves seen late in 2015, given some uncertainty with a tepid economy.
There’s some history to point out.
"Stock market volatility, as defined by one-day gains of 1% or more, has risen on average in the three months after the first in a series of Fed rate hikes for 77% of the time since 1967," Stovall says.
As year-end approaches, this is a good time for traders and investors to evaluate their positions, allocations, and their time horizons, asking: "Am I still in the place where I want to be? The world has changed a lot in the past few months," says Kinahan.
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