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 2,100 (Goldman Sachs' David Kostin) to a groupthink high of 2,500 (Federated Investors' Stephen Auth). Most of the rest were crowded around 2,200.
My own forecast practically puts me off this chart altogether.
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 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: 1,875-1,900
Euro Range: $0.98-$1.10
Yen Range: 120-145
10-Year Treasury Range: 1.8%-2.6%
U.S. GDP Growth: 2.0%
U.S. Presidential Election Winner: Marco Rubio
Based on where the S&P 500 closed yesterday (2,078), 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.
2015 was a tale of two markets. The so-called FANG stocks flourished:
Facebook Inc. (Nasdaq: FB) +36.5% (through Dec. 29)
Amazon.com Inc. (Nasdaq: AMZN) +124%
Netflix Inc. (Nasdaq: NFLX) +144%
Alphabet Inc. (Nasdaq: GOOG) +47.9%
In addition, another group of large-cap stocks also did well - The Priceline Group Inc. (Nasdaq: PCLN), eBay Inc. (Nasdaq: EBAY), Starbucks Corp. (Nasdaq: SBUX), Microsoft Inc. (Nasdaq: MSFT), and Salesforce.com Inc. (NYSE: 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 U.S. 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, are trying to make a case for things going up.
Again, my target on the S&P 500 is 1,875-1,900. 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 1,840. If the market drops below 1,840, 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 and 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.
Because the truth is, there are plenty of places to put your money other than stocks if you have the wherewithal to find them.
Of course, there are always pockets of opportunity – even in the stock market.
As you can see, I only have two long recommendations that are just stocks. The rest are gold-related, volatility-related, or mortgage REITs.
You’ll note that I’ve listed two gold mining long plays – 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 exchange-traded funds (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.
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.
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About the Author
Prominent money manager. Has built top-ranked credit and hedge funds, managed billions for institutional and high-net-worth clients. 29-year career.
The S&P 500 will hit at least as low as $1,653.08 below the 200 day MA before maintaining new highs. This number is based on a pattern I found and it is over a year over due. When the S&P hits this number start pilling in your money for long term. Let everyone laugh but this is happening.
Will you please explain "pilling" in your money?
David, What is This number is based on a pattern I found and it is over a year over due. If this pattern is over a year due and you've been holding this position then your in losses my frien. Go into further detail about this patter if any one is going to remotely believe your forcast of over a tear ago wish list. TryHow does my indicator work to perfectly predict stock market crashes 100% of the time? I utilizes the BofA Merrill Lynch US High Yield Master II Option-Adjusted Spread (OAS), which is the calculated spread between an index of all corporate junk bonds (rated BB or below) and US Treasuries. I created a chart of the High Yield/Junk Bond OAS and added the S&P 500 to the opposite axis.
Normally, when the S&P 500 rises, the junk bond spread simultaneously declines. To make it easier to compare their latest trends, I inverted the High Yield/Junk Bond OAS chart. If the S&P 500 is rising and the junk bond spread is simultaneously tightening like it’s supposed to – both the S&P 500 chart and the High Yield/Junk Bond OAS chart will rise together. If the S&P 500 is declining and the junk bond spread is simultaneously widening like it’s supposed to – both the S&P 500 chart and the High Yield/Junk Bond OAS chart will fall together.
The’s indicator then calculates the trailing 12 month correlation between the S&P 500 and High Yield/Junk Bond OAS. During normal healthy economic/market conditions of the S&P 500 rising alongside tightening junk bond spreads and declining alongside widening junk bond spreads – the correlation between the two will be very negative. Since 1997, the correlation has averaged -75.07% and has been in negative territory 86.1% of the time.
Very rarely do these two trends diverge from each other. When the S&P 500 bottomed during the financial crisis in March 2009 at 676.53, the junk bond spread at the time was 18.86%. For the following 63 consecutive months, the S&P 500 trended upward as junk bond spreads trended downward – averaging an unbelievably strong negative correlation during this time period of -90%. In June 2014, the High Yield/Junk Bond OAS hit a new 7-year low of 3.35%, with the S&P 500 simultaneously reaching 1,963 up 190% from its bottom.
During the 12 months since then, the S&P 500 has continued soaring to record highs, but extremely concerning is its divergence with the High Yield/Junk Bond OAS that has occurred since then. As the S&P 500 continued rising to new record highs, the High Yield/Junk Bond OAS should have continued declining back to its record low set in 2007 of 2.41%. Instead, as the S&P 500 gained 6.52% to a new record high in December 2014 of 2,091, junk bond spreads simultaneously increased as much as 236 basis points to 5.71%. This caused their correlation to soar from an incredibly strong June 2014 low of -97.5%, to a positive year-end 2014 correlation of 40.81%, its first positive correlation in 7 years.
Their recent divergence is extremely similar to what occurred in mid-2007 when the S&P 500 reached its pre-financial crisis peak. After the High Yield/Junk Bond OAS set a record low in June 2007 of 2.41%, junk bond spreads increased as much as 238 basis points to 4.79% within the following three months – as the S&P 500 continued rising to new record highs. This caused their correlation to become positive for the first time in 7 years, signaling with the S&P 500 trading at 1,520.27 that a crash was coming. The S&P 500 declined 55.5% over the following 16 months.
In 2000, their correlation becoming positive marked the very top of the dot-com bubble, right before a two-year decline of 47.55%.
The 2015 divergence has been much more dramatic than in 2000 and 2007 – with their correlation reaching 60.07%, which is the most positive it has been in 17 years. This is a strong indicator that the upcoming crash could be far more devastating than the previous two.However other events can occur, meaning it will happen in less time or may take more time.Stay tuned.
Reference chart below….BofA Merryll Lynch US High Yield Master II Option-Adjusted Spread (OAS) vs. S&P 500 and Trailing 12 Month Correlation
In the early days of 2016 it was the best investmemt market analysis that I study in your newsletter. It was so interesting for me and i try to think about how to invest my money in the comming year. Thanks for all your help to the readers.
Thank you for your valuable insights into advice for Longs and Shorts for 2016. Even more valuable information we all currently need for back-testing involves a list of the best investments which had successfully weather the storms of past corrections and recessions since 1970. This is even more essential for those who are now retired and re-positioning their retirement portfolios for the event of a crash.
Hi,
I`m just wondering how a major credit/financial crash will be affected by the gov`t giving the banks the right to seize money from depositors` accounts, via the Dec 11/15 omnibus bill, in order to keep the banks from failing?
How do depositors protect themselves?
what to do with promising stocks like Sunedison, Nividia, etc
and Apple,
How much of a place is there for them?
Looking forward to 2016
Like the process you use to make your reccommendations solid.
instead of shorting the biotech etf, i buy the inverse etf.