Our analysis of 2016 “surprises” discusses lower-probability, but high-impact events that may unfold over the course of 2016. While no one can predict the future, the surest way to build a surprise-resistant investment plan is to take the time to consider all potential outcomes. Thinking through all possibilities, even those that may not be the most probable, can help investors understand how different scenarios may play out, and allow them to see the warning signs that may indicate a shift is ahead. With this in mind, we explore potential surprises that could impact markets in 2016…
The long anticipated sustained rise in interest rates has failed to materialize over the past several years. Is 2016 the year? Market-based estimates of future interest rates are low, but a pickup in inflation, better economic data, or both could easily lift those expectations and bond yields along with them….
This week’s commentary features content from LPL Research’s Outlook 2016: Embrace the Routine. Gains in 2016 may require tolerance for volatility. Stocks historically have offered a tradeoff of higher return for higher risk, the gain of more upside than high-quality bonds versus the pain of market volatility and losses. For the last few years, U.S. stock markets provided below-average pain, while still providing strong returns. Between October 2011 and July 2015, the S&P 500 Index went nearly four years without a “correction” of more than 10%, while climbing an average of 20% a year. Although we expect average returns for stocks in 2016, the path to reach them will be anything but routine. LPL Research expects stocks to produce mid-singledigit returns for the S&P 500, consistent with historical mid-to-late economic cycle performance, driven by mid- to high-single-digit earnings and a largely stable price-to-earnings ratio (PE). This return to a more normal market may mean more volatility, challenging investors’ ability to stay focused on their goals.
HOW IS 2016 SHAPING UP?
In 2016, we expect the macroeconomic environment to be molded by a midto-late cycle U.S. economy, modest inflation, and the start of a Federal Reserve (Fed) rate hike campaign. If the U.S. does not enter recession in a given year, the probability of an S&P 500 gain is 82%, based on historical data from 1950 to present. Heading into 2016, there have been scant signs of excesses in the U.S…
When you think of a routine, what is the first thing that comes to mind? Some may think, it’s the mundane, the small steps and processes you follow to accomplish all your tasks for the day. But routine is more than that. It’s about forming good habits, feeling prepared. And perhaps the best part of a routine is the comfort that comes from knowing what to expect. For investors, the definition of a good routine would be knowing what to expect from the markets.
Is there such thing as a routine year for markets? Over the last 50 years, the S&P 500 Index grew at an average of about 10% a year, but its return was between 0% and 20% in any single year less than half the time. We haven’t witnessed a price return of 6 – 11%, a range that might be considered typical for markets, since 1992, over 20 years. And even when there was a year in the routine 10 – 20% range, there were other things going on in the markets that made the year feel anything but routine. Yields may have been extraordinarily low, or extraordinarily high. Commodities were booming, or collapsing. There really is no such thing as a routine year for markets. However, your financial advisor and LPL Research’s Outlook 2016 can help you prepare for what we may see in the year ahead.