My 2016 Market Forecast Is Almost Off the Charts

As usual, none of Wall Street’s so-called “top strategists” in a recent Barron’s survey are calling for stocks to decline in 2016. All of them are calling for the bull market to continue next year.

Their 2016 S&P 500 forecasts varied from a groupthink low of 2100 (Goldman Sachs’ David Kostin) to a groupthink high of 2500 (Federated Investors’ Stephen Auth). Most of the rest were crowded around S&P 2200.

My own forecast practically puts me off this chart altogether.

year end S&P

Anyone who challenges the incessant bullish consensus is invariably accused of being a “permabear,” but that moniker does not apply to me. I learned a long time ago that my job is to take the world as it is, not as I would like it to be. That’s the promise I make to my clients and to my readers. Sometimes that will be mean I’m bullish, as I was in 2013 and 2014, and sometimes it won’t, but it’s always based on my assessment of the world. Not hopes or prayers. I figure if you want to feel cozy, you’ll watch the pap that the financial news channels feed to their viewers to keep them tuning in and the advertising dollars rolling in. Of course, that didn’t serve you well in 2015, and it certainly won’t in the next 12 months.

Here’s my complete 2016 market forecast.

2016 S&P 500 Year-End Target: 1875-1900

Euro Range: $0.98-$1.10

Yen Range: 120-145

10-Year Treasury Range: 1.8%-2.6%

U.S. GDP: 2.0%

U.S. Presidential Election Winner: Marco Rubio

Based on where the S&P 500 closed yesterday (2078), I expect it to end 2016 down 10%.

I believe we’re in a stealth bear market that began in late 2014 after China’s economy began to weaken, the global commodity complex began to collapse, and the Fed signaled the beginning of its current tightening cycle with the end of QE. I argued a year ago that the rule that bear markets do not begin without a recession or the Fed initiating an aggressive tightening cycle (which it clearly hasn’t done and won’t do) should be questioned at the zero bound. I believe that market behavior has proven me correct; again, much of the market is already in a stealth bear market disguised by the performance of the cap-weighted indexes.

Not a “Permabear”
At the beginning of both 2013 and 2014, I called for the S&P 500 to rise in the following 12 months, which it did. But in January 2015, after watching oil and the rest of the commodities complex collapse over the second half of 2014 in concert with China’s slowing economy and the demise of the weakest segment of the high yield bond market (CCC and B-rated bonds), I concluded that the end of the post-crisis bull market had arrived. Having correctly called the credit crisis of 2001/2 and the financial crisis of 2008/9, I saw similar warning signs suggesting that investors should protect their assets.

I continue to believe that we are in a bear market and that 2016 will bring more pain, especially for investors who believe markets can defy the headwinds that buffeted them in 2015 and continue to blow hard.

2015 was a tale of two markets. The so-called FANG stocks flourished: Facebook Inc. (FB, +36.5% through December 29), Amazon.com Inc. (AMZN, +124%), Netflix Inc. (NFLX, +144%), and Alphabet Inc. (GOOG, +47.9%). In addition, another group of large-cap stocks also did well – The Priceline Group Inc. (PCLN), eBay Inc. (EBAY), Starbucks Corp. (SBUX), Microsoft Inc. (MSFT), and Salesforce.com Inc. (CRM). But once you moved beyond these nine stocks, much of the rest of the market experienced a stealth bear market and energy and commodity-related stocks crashed. Market breadth is among the poorest in memory because it reflects the weakness in broad sectors of the economy including commodities, retail, and media and the overall tepid health of the consumer. Furthermore, investors seeking yield saw their capital eroded in large bond funds and experienced large losses in energy MLPs and junk bond funds. There were a lot of broken heroes on a last-chance power drive.

This year will be different. The continued strength of the dollar, a topic on which my brilliant friend Raoul Pal continues to be ahead of everybody else, will maintain downward pressure on commodity prices and U.S. corporate profits next year. Rather than drag the market higher, I believe the FANG stocks will move lower and meet the rest of the market. (They are on my short list this year, which you’ll see below; I am not saying they will crash, but they could easily drop by 20%.)

The Likelihood of a Super Crash in 2016

As we enter 2016, I am very bearish and want to make that very clear to you.

None of the factors pressuring markets are going away – China, commodities, and slow global growth are here to stay I do not see a lot of one-year, short-term long plays. A big sell-off across the board is more likely than a rally in anything at this point. The smartest people I know – with very few exceptions – are very bearish. Only the consensus and Wall Street, which is paid to be bullish, is trying to make a case for things going up.

Again, my target on the S&P 500 is 1875-1900. But as to the possibility of a more serious Super Crash by the end of 2016, keep this number in mind. The key technical level on the S&P 500 is 1840. If the market drops below 1840, all bets are off and the correction could turn into something much worse. If there is a Super Crash it will turn into a deep recession because the Fed and other central banks are out of bullets. But I think it likely we may be looking at a multiyear bear market.

New Strategies, Pockets of Opportunity

The tired question that people keep repeating – “where else are people supposed to put their money?” – should be left to those without imagination or the ability to access genuinely talented managers, contrarian thinkers, or unique strategies. There are plenty of places to put your money other than stocks if you have the wherewithal to find them.

If you are reading this newsletter, you are taking the first step on that road. I’m going to share my best ideas with you here in Sure Money.

Of course, there are always pockets of opportunity – even in the stock market.

My Recommendations

As you can see, I only have two long recommendations that are just stocks. The rest are gold-related, volatility-related, or mortgage REITs.

Going Up (Long) Symbol Price 12/29/2015 Comments
Alcoa Inc. AA $10.13 Undervalued
Annaly Capital Management Inc. NLY $9.40 Big dividend, NAV discount
Central Fund of Canada Ltd. CEF $10.04 Gold/silver at a discount
Chimera Investment Corp. CIM $13.88 Big dividend, NAV discount
CBOE Market Volatility Index VIX $16.10 Volume will increase
Global X Gold Explorers ETF GLDX $16.79 Gold miners
Market Vectors Junior Gold Miners ETF GDXJ $19.64 Gold miners
Navient Corp. NAVI $11.49 Undervalued
ProShares Short S&P ETF SH $20.54 Bear market
Sprott Physical Gold Trust PHYS $8.76 Gold

 


You’ll note that I’ve listed two gold mining longs – having previously told you here that  miners were not a good way to invest in gold. These gold miners are a very leveraged bet on a recovery in gold and are so out of favor that they are worth a shot. Further, I am recommending the ETFs rather than individual stocks to mitigate the individual operating issues associated with individual companies. These are long-term picks that could easily take more than one year to work out because gold is a multiuser play.

The short side, on the other hand, is ripe. Here’s what I’m recommending as a short. As always, I recommend investors use options to short stocks in order to minimize losses and maximize gains while using capital efficiently.

Going Down (Short) Symbol Price 12/29/2015 Comments
Alphabet Inc. GOOG $776.60 Overvalued
Amazon.com Inc. AMZN $693.97 Grossly overvalued
Chipotle Mexican Grill Inc. CMG $489.94 Overvalued, E. coli
Deutsche Bank DB $24.87 Overleveraged
Facebook Inc. FB $107.26 Overvalued
Fitbit Inc. FIT $29.35 Fad
iShares Nasdaq Biotechnology ETF IBB $343.00 Overvalued
Netflix Inc. NFLX $119.12 Overvalued
SPDR S&P 500 ETF SPY $207.40 Bear market
Standard Chartered plc STAN.L 581p Overleveraged
Starbucks Corp. SBUX $61.13 Overvalued
Tesla Motors Inc. TSLA $237.19 Overvalued

 


Despite the challenges ahead, it’s going to be a terrific year to be an investor. I’m glad you’re with me.

Happy 2016.

Michael

39 Responses to “My 2016 Market Forecast Is Almost Off the Charts”

  1. I agree. NUGT is leveraged junior gold miner ETF that will give huge gains as the price of gold advances. And even though interest rates are generally on the rise, shorting T-bonds can be dangerous during a steep stock market decline. Check what happened to T-bonds yields during 2008. So if you’re going to short bonds, do it in the high yield sector. Plus, the gold/silver has been excessively high for a long time now, so silver (as usual) should outperform gold during their next bull market. And that high ratio also tells you the market is getting ready to turnaround.

  2. First, thanks for your opinion and your recos. I think your assessment makes sense. However, I’m not quite sure that the FED is out of bullets. Two memes are slowly popping up; the first one is that the US’s debt level is very low given the huge value of the country’s assets, the second is negative interest rates. I don’t think Rubio is going to be Prez. The chasm in the republican party is big and the democrats are united.

  3. AA is more tied to economic growth than any other company in this world. How can this be a long given your outlook? Your analysis of CMG is also suspect, have you actually visited any location? They are still packed, maybe not the across the block long lines as before, but i thing they will post a much smaller SSS loss than the street expects…

  4. Hold on to your hat 2016 is going to be a roller coaster and a lot of people will be getting burnt, nice to read some sense about the overpriced fangs, that have been holding the market up in 2015, they cannot do that forever, when they sneeze all the others will catch the cold, 2016 the year of the short

  5. Like and/or agree with the majority of your comments, projections, etc.; however, I don’t understand your somewhat bullish bias on gold. While I acknowledge it as the age-old symbol of wealth and prosperity, worldwide, I think that blush is off the rose…or whatever that expression is. Other than it being pretty, making nice jewelry and plating slot machines, what do you do with it? 2nd best conductor of electricity; silver is #1. Am I going to use gold at roughly $1,100/oz. or silver at approximately $15/oz? It’s the best conductor of heat. Haven’t seen too many gold radiators. Presuming you can find a reputable broker and accurately understand the all-in costs (spot + premium/mark-up + shipping + insurance + storage), what do I do with it? If I store it in my house and am stupid enough to let anyone know, I better have a big Doberman. When/if we become 3rd world, how do I spend it? Walk on down to the grocery store (if it’s even open) or the gas station and hack off a piece. I really don’t get it. Anyway, I see gold going down well below $1,000/oz (mid $100’s) in the next 1-2 years. I don’t think the world views it like they use to (China and Russia notwithstanding). As bad as commodities are in general, at least I know what to do with steel, aluminum, cooper, etc. Be well.

    • I’ll write a column for you soon about cash as a position.

      Meantime here’s the model portfolio I like for a typical investor based on the state of the post-crisis world. Of course, discuss your investments with a professional and all that.

      1 – Gold, Precious Metals, Tangible Assets – 10-20%
      2 – Cash – 10-20%
      3 – Absolute Return Strategies – 20-40%
      4 – Dividend Paying Equities – 20%
      5 – Income Generating Securities – 10-20%

  6. Jeffery L Draper

    I find it to be very interesting that Donald Trump and Ted Cruz do not criticize each other. I think that they have the best shot. While I have reservations about Donald Trump, he gets the same sort of criticism that Ronald Reagan got when running against Ford for the 1976 nomination and Carter for the 1980 general election. Hillary wil be abandoned by the same young voters that went for OBama.

  7. Agree with your portfolio recommendation except a little more on actual hard cash in personal vault to be 20-30%, only necessary operating cash in banks. Lighten only 1-2% on each of other Rec.

    Thanks, as to political I am Trump/Cruz fan, supported Reagan big time, and see the same big-picture thinking. Who else is going to say “shut up and sit down, you had your turn it was terrible” when the current Pres gets the photo ops and pressers every day like no other pres has ever done. Tell me who….! Press will not listen to next Pres at all if Republican and the current ones we put in Congress need a foot in the *ss too! Trump will tone down the public rhetoric as he moves into position. He knows exactly what he is doing and so does Cruz.

  8. I ditto the silver over gold due to the ratio making it undervalued. When viewed as money it will jump up way more than gold % wise.
    The elephant in the room is China’s under reporting of it’s gold reserves. Possibly 20x more than the reported amount. If they hit the market with a “Shanghai Surprise”, and peg their currency to gold, look out dollar!

  9. sailingsnowbird

    As long as interest rates remain low money looking for a home will go to stocks. That is unless stocks look like they are heading down. This is obvious to most. The doom and gloom says have been forecasting the big down fall for at least 5 years. I’ve been a sucker for this which has cost me a of money . I agree that governments are broke, but some companies are in a strong financial condition. So just invest in those companies like the Canadian National Railroad and hang on.

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