2016 investment forecasts: Expect lower returns

NEW YORK -- Investing is becoming more of a grind. Expect it to stay that way.

Analysts, mutual-fund managers and other forecasters are telling investors to expect lower returns from stocks and bonds in 2016 than in past years.

See Full Article

They're also predicting more severe swings in prices. Remember that 10 percent drop for stocks that freaked investors out in August? It likely won't take another four years for the next one.

The good news is that few economists are predicting a recession in 2016. That means stocks and other investments can avoid a sustained slide and keep grinding higher, analysts say. Next year is expected to look more like this year, with gyrating stock prices on track to end close to where they started, than the bull market's euphoric earlier years like 2013 and its 32 percent surge in the Standard & Poor's 500 index.

"You have to be realistic and think the outsized runs we've had - in 2013, for instance - are pretty unlikely," said Mike Barclay, portfolio manager at the Columbia Dividend Income mutual fund. "Trees don't grow to the sky."

The list of reasons for muted expectations is long. Economic growth around the world remains frustratingly weak, and earnings growth for big U.S. companies has stalled. Stock prices aren't cheap when measured against corporate earnings, unlike the early years of this bull market. The Federal Reserve also just lifted short-term interest rates for the first time in nearly a decade. Besides making all kinds of markets more volatile, higher rates could also hurt prices of bonds in investors' and mutual funds' portfolios.

The investment-bank Barclays gave this succinct title on its 100-page outlook report for 2016: "Curb your expectations."

While it's worth knowing the general sentiment on Wall Street, it's also worth remembering financial forecasters have a spotty record for accuracy.

Analysts cite a long list of risks that could upend their forecasts. Investments could tank if an unexpected spike in inflation rips through the global economy, for example, or if the slowdown in the world's second-largest economy, China, ends up even more severe than feared.

But there is some comfort in the subdued forecasts - they are a sign that the greed and mania characteristic of past market peaks, such as the dot-com bubble, may not be a problem.

"We think investors will be rewarded over the next five to 10 years with decent inflation-adjusted returns," said Joe Davis, global head of the investment strategy group at mutual-fund giant Vanguard. "That said, they will likely pale in comparison to the strong returns we've had over the last five."

Here's a look at how analysts see investments shaping up in 2016:

U.S. STOCKS

Corporate profit growth hit a wall this year, as plunging prices of oil and metals slammed energy and raw-material producers, the stronger dollar hurt exporters, and economic growth remained tepid. Analysts expect profits to stabilize next year, but companies across many industries are groping for revenue growth amid the still-slow global economy.

Stocks in the S&P 500 are no longer cheap relative to their earnings, the most common gauge of stock prices. The index is trading at 17.2 times its earnings over the last 12 months, higher than its average of 14.5 over the last decade. A measure that looks at price and longer-term earnings trends popularized by economist Robert Shiller, a Nobel prize winner, is also more expensive than its historical average.

These already high stock prices leave little room for them to rise further without some impetus from the economy or better profits.

Investors should also brace for dips. The market's big drop in August was so rattling because it hadn't happened since October 2011, an abnormally long time. Since World War II, investors have been hit with drops of at least 10 percent every 19 months, on average.

Goldman Sachs strategists are forecasting the S&P 500 will end 2016 at 2,100, which would be a 4 percent rise from Monday's close of 2,021. Barclays expects the index to rise 9 percent, and Deutsche Bank expects it to rise 11 percent.

All would be a step down from past results. The S&P 500 gained 15 percent annually on average from 2009 through 2014, not including dividends.

FOREIGN STOCKS

Investors have a strong yen for foreign stocks. They poured a net $208 billion into international stock funds in the last year, while pulling $56 billion from U.S. stock funds.

One reason for the migration is that investors want to make their portfolios look more like the broad market. Foreign stocks make up about half the world's market value but are often just a sliver of 401(k) portfolios.

Also, central banks in Europe, Japan and elsewhere are pumping stimulus into their economies to drive growth, when the Federal Reserve is moving in the opposite direction.

And earnings growth in Europe and other regions looks to be accelerating more strongly. Dale Winner, portfolio manager at the Wells Fargo Advantage International Equity fund, expects profits for European companies to grow in the neighborhood of 15 percent. For U.S. companies, meanwhile, he's expecting close to zero growth.

Investing in foreign stocks, though, can introduce new risks. Changes in the value of currencies can skew returns, and growth from country to country can be uneven. For example as China shifts its economy toward consumer spending and away from heavy industry, it is hurting Brazil and others that produce the commodities that China used to be so voracious for.

BONDS

One of bond investors' biggest fears has arrived, now that the Fed's raising rates again.

Prices of bonds in mutual-fund portfolios drop when rates rise, because their yields are less attractive than those of newly issued bonds. But analysts say Armageddon isn't arriving, even though critics have long warned about a "bond bubble."

Most importantly, the Fed plans to increase short-term rates slowly and by very small increments. "Lower for longer" has become a mantra among bond investors. Longer-term rates, meanwhile, depend not just on where the Fed is heading but also inflation, and many investors don't see it getting out of hand.

Higher interest rates also mean bond investors will eventually be rewarded with higher income. Many analysts say that those rising bond income payments could offset the gradual decline in bond prices enough to produce positive - albeit modest - total returns.



Advertisements

Latest Economic News

  • 'There isn't a best card out there': How to choose a credit card that works for you

    Economic CBC News
    Credit cards are sometimes lambasted as high-cost consumer debt that can quickly get borrowers into trouble. But if you pay off the balance each month, credit cards can also have significant perks. Loyalty programs like Air Miles, which has both a standalone program and partnerships with credit cards, have drawn a lot of criticism lately, but Canadians are still attached to credit cards that offer rewards. Source
  • Chevron says it has won the latest round in an Ecuadorian legal battle

    Economic CTV News
    Oil giant Chevron Corp. says it has won a round in the Canadian courts in a complex legal battle with a group of Ecuadorian villagers who are trying to collect on a massive judgement they won in Ecuador's courts. Source
  • Liberals ask President Trump to approve Keystone XL pipeline

    Economic CTV News
    Canada’s natural resources minister says that he hopes the new U.S. administration will allow the Keystone XL pipeline quashed by Barack Obama to proceed, noting that all Canadian regulatory approvals are in place. Jim Carr spoke to CTV’s Power Play from Washington, D.C. Source
  • Apple depicts Qualcomm as a shady monopolist in US$1B lawsuit

    Economic CTV News
    SAN FRANCISCO -- Apple is suing mobile chip maker Qualcomm for $1 billion in a patent fight pitting the iPhone maker against one of its major suppliers. The 100-page complaint filed Friday in a San Diego federal court depicts Qualcomm as a greedy monopolist abusing its power in a key segment of the mobile chip market to extort royalties for iPhone innovations that have nothing to do with Qualcomm's technology. Source
  • Trump's 'America first' tone worries head of Canadian oil and gas industry group

    Economic CTV News
    Trump takes charge: Sworn in as 45th president of the U.S.A. Source
  • Obama administration urges Canada to reverse Super Bowl ad decision

    Economic CTV News
    OTTAWA - In one of its final communications with Canada, the outgoing Obama administration is engaging in pigskin politics: asking the Trudeau government to overturn a regulation affecting ads during the Super Bowl. The U.S. Source
  • Oil and stock prices higher as Donald Trump sworn in

    Economic CBC News
    Stock markets responded to the first day of the Trump Administration in a largely positive way, with the Dow Jones, the Nasdaq and the S&P 500 all higher on the day of his swearing in. The Dow Jones Industrial Average was up by nearly 100 points to 19,829 just minutes before the new president formally acceded to the position. Source
  • Stocks higher as Donald Trump lays out glimpse of future economic policies

    Economic CBC News
    Stock markets responded to the first day of the Trump Administration in a largely positive way, with the Dow Jones, the Nasdaq and the S&P 500 all higher on the day of his swearing in. The Dow Jones Industrial Average was up by nearly 100 points to 19,829 just minutes before the new president formally acceded to the position. Source
  • Stocks close higher as Donald Trump lays out glimpse of future economic policies

    Economic CBC News
    Stock markets responded to the first day of the Trump Administration in a largely positive way, with the Dow Jones, the Nasdaq and the S&P 500 all higher on the day of his swearing in. The Dow Jones Industrial Average was up by nearly 100 points to 19,829 just minutes before the new president formally acceded to the position. Source
  • Navdeep Bains defends open borders for global trade in Davos speech

    Economic CBC News
    Automakers on both sides of the border fear the potential negative effects of a Donald Trump presidency, Canada's economic development minister said Thursday as he met with international business and political leaders in Switzerland. Navdeep Bains said he's been having nervous conversations with concerned automakers, both at the recent auto show in Detroit and during his current visit to the World Economic Forum in Davos. Source