Editor's pick: Originally published Jan. 5.
The start of a new year is a favorite time for stock market analysts and pundits to make predictions about the upcoming 12 months. While these forecasts can be enjoyable to read, you shouldn't get too excited about predictions of gains in 2016.
Market forecasters often enter a new year optimistically.
It is difficult to say what investors will be talking about this time next year. That said, predictions can be an illustrative way to gauge sentiment, or to analyze what market factors analysts are most excited or concerned about. Here are five predictions for 2016 that have received some notice. And, for fun, here are five silly forecasts that aren't saying much of anything or are unlikely to occur.
Interesting prediction No. 1:Energy stocks will lead the market higher in 2016.
This is based on the theory that the worst performer one year will be the best performer the next, as investors seek bargains in the sector and companies benefit from easy year-over-year comparisons. Oil was one of the big market stories of 2015, and it's a reasonable bet that the commodity will recover off its multi-year lows in 2016.
Dumb prediction No. 1:Markets will be volatile.
It isn't that this prediction is wrong, just that it's so generic as to be meaningless. Markets are always going to fluctuate; that's what they do. Even a quiet year will see sessions of big gains or sharp declines. A more specific prediction for volatility -- for example that the VIX will stay above its long-term average of 20 throughout 2016 -- is worth considering, however.
Interesting prediction No. 2:Mortgage rates will not rise in 2016.
The Federal Reserveraised rates in December for the first time in nearly 10 years, and many expect a spillover from these changes into the mortgage market. While it's true that interest rates and mortgage rates are correlated, the supply of homes on the market will keep mortgage rates low, and longer-term rates are unlikely to rise even if the Fed continues raising rates next year.
Dumb prediction No. 2:Interest rates will rise.
This is another statement that doesn't offer meaningful commentary. The Fed may continue raising rates in 2016, but we expect that the actions will be gradual. If overall interest rates rise, the increase will be minimal.
Interesting prediction No. 3: Crude oil will rebound as Saudi Arabia and OPEC lower supply.
Hopes for this were dashed recently, as an OPEC meeting failed to result in lower production targets. However, the persistently low prices have wreaked havoc on a lot of countries, including Saudi Arabia and Russia, and the economic pain they're feeling may be the push OPEC needs to make changes. Meanwhile, an overall acceleration in economic growth will help oil on the demand side.
Dumb prediction No. 3: The presidential election will drive market returns.
Contrary to what some say, over the long term (since 1930), returns of the S&P 500 have been 0.2% less during election years than others.
Interesting prediction No. 4:Corporate profits will rebound sharply.
While it hasn't really been reflected in the market, earnings have been tepid of late. Profits disappointed in 2014, while growth was negative in 2015 (excluding stock buybacks). That sets the market up for easy comparisons in the coming year, especially as U.S. growth continues to chug along. This is where energy shares may make their presence known the most -- after the devastation to their profits this year, growth will be easy to come by (in percentage terms, at least).
Dumb prediction No. 4:The U.S. will fall into a recession.
An official recession is defined as two consecutive quarters with negative GDP growth. Right now, we have GDP growth of 2.5%, along with low energy prices (which help consumers). It would be unprecedented for the economy to fall into recession given that backdrop. It's difficult to imagine an unforeseen headwind -- geopolitical tension, for example -- that could have that kind of severe and protracted impact. It's wise to be diligent, of course, but perma-bears should go back into hibernation on this one.
Interesting prediction No. 5:The S&P 500 will rise by more than 10% in 2016.
This theory flies in the face of caution by market prognosticators, who remain concerned about China's growth and demand for commodities. However, these kinds of rallies usually happen when they're not expected - bull markets "are born on pessimism and grow on skepticism," as the saying goes. The fact that there isn't euphoria out there is one of the most reliable signs that prices remain reasonable, and that the long-term trajectory remains positive.
Dumb prediction No. 5:There will be performance divergence.
Obviously. Why would different securities ever be expected to consistently perform in the same way?
This article is commentary by an independent contributor.