2015 was a fairly disappointing year for most investors with flattish returns and a sizable summer correction that jarred sentiment. To be sure, we weren\u2019t expecting much to begin with for stocks on the year \u2013 modest single digit returns that would, perhaps, move in-line with aggregate earnings growth. Therein lied the problem \u2013 the year didn\u2019t produce aggregate earnings growth!
\nThe issue, of course, was the Energy sector. We expected weakening earnings with falling crude prices. But, the extent of the damage in the sector was more than substantial given that crude oil prices fell much faster and farther than anyone could have anticipated. The end result is that the Energy sector tugged the aggregate S&P 500 earnings numbers into negative territory, which looks bad on paper but also masks strengths in other areas of the economy.<\/p>\n
When 2015 is all said and done, we expect earnings to have fallen 0.3% on the year, and the market\u2019s performance simply to reflect that.<\/p>\n
Are There Reasons to be Hopeful Going Forward? <\/strong><\/p>\n There are plenty. Perhaps the biggest one is that, if you strip away the Energy sector from aggregate S&P 500 earnings, you\u2019ll find that earnings growth was nicely positive on the year for just about every other sector. Additionally, we think the lion\u2019s share of the big losses in Energy are already on the books. Now, it\u2019s a matter of the strong surviving and earnings in the sector leveling-off as crude oil prices do the same.<\/p>\n For the broader S&P 500, consensus has earnings growth for 2016 at +7.8%, which I\u2019d even say is a little too optimistic. I\u2019m looking for earnings more in the 4%-5% range, and I think stock prices could mimic that number just like they did in 2015.<\/p>\n Another big part of looking ahead to 2016 is recognizing the forces that held stocks back in \u201915. Earnings growth (ex-Energy) was healthy, so we think it\u2019s safe to assume that there\u2019s a \u2018lane\u2019 open for stocks to rise through. Aside from Energy, we think some of the other forces restricting stocks in 2015 should fade in the coming year.<\/p>\n Europe has started to turn the corner into a growth cycle, and the efforts by the European Central Banks to stimulate the broad economy using quantitative easing have largely been effective. But, there were pesky issues holding Europe back from a comfortable growth pattern \u2013 there were issues with Russia and the Ukraine, a humanitarian crisis with Syrian refugees seeking asylum, more Greek bailouts and an awful terrorist attack. The good news is that all of those headwinds we see as temporary and surmountable and, beneath the surface, Europe is gaining real strength. It will start to show once those issues fade and could be a boon to global stocks.<\/p>\n Another factor was China\u2019s slowing growth and fears that it is slowing too fast. We see these fears as overblown. China is intentionally making moves to restructure its economy, and a marked slowdown in manufacturing and state investment is the expected collateral damage. It\u2019s weighing on growth, but the media\u2019s fixation on the 7% number seems silly. China\u2019s contribution to global GDP is still enormous if growth falls to 6.5% or even 6%, which seems unlikely.<\/p>\n The recent upwelling of attention on the high yield market also has some worried, with spreads rising and some defaults occurring at the margin. But, again, we have Energy in large part to blame. Junk only comprises about 25% of the total corporate bond market anyhow, and it\u2019s not like the entire junk bond market is doomed. When you look at the aggregate credit picture, the troubled area is just a piece of a piece of the debt market. And that piece is really small.<\/p>\n Bottom Line for Investors <\/strong><\/p>\n If you take these three headwinds together, what you actually create is that lovely \u201cwall of worry\u201d that stocks yearn to climb. And, that adds to our bullishness. Investors are actively looking for things to fear, and I think this will persist throughout 2016. If it does, and an earnings recovery takes hold in earnest, we expect stocks to do just fine.<\/p>\n All the Best in 2016! 2015 was a fairly disappointing year for most investors with flattish returns and a sizable summer correction that jarred sentiment. 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\n– Mitch<\/p>\n","protected":false},"excerpt":{"rendered":"