Lower returns and bigger price swings expected in 2016

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 per cent 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 per cent 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 per cent 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 per cent rise from Monday's close of 2,021. Barclays expects the index to rise 9 per cent, and Deutsche Bank expects it to rise 11 per cent.

All would be a step down from past results. The S&P 500 gained 15 per cent 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 neighbourhood of 15 per cent. 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

  • Free speech vs. copyright in Supreme Court battle between Google, B.C. firm

    Economic CTV News
    OTTAWA -- A legal fight between Internet giant Google and a British Columbia technology company unfolds today in the Supreme Court of Canada, where they will duel over competing free speech and copyright infringement issues. Source
  • Asian stocks rise after record day on Wall Street

    Economic CTV News
    HONG KONG - Asian stocks rose Tuesday following another record day on Wall Street as investor optimism bounced back quickly after the Italian referendum. KEEPING SCORE: Japan's benchmark Nikkei 225 index climbed 0.5 per cent to 18,370.83 and South Korea's Kospi jumped 1.2 per cent to 1,985.85. Source
  • Ikea to offer expanded parental leave

    Economic CTV News
    NEW YORK - Ikea's U.S. division is offering longer parental leave to employees who are new parents, following similar overtures from tech companies like Netflix as it strives to keep good workers in an improving job market. Source
  • Indians look for solutions only when toxic pollution soars

    Economic CTV News
    NEW DELHI -- The truth of New Delhi's toxic air finally hit home for Rakhi Singh when her 3-year-old son began to cough constantly early this year. She bought air purifiers for her home. When a thick, grey haze turned the view outside her home into a scene from a bad science fiction film last month, she bought pollution masks. Source
  • China appeals to U.S. to stop disrupting acquisitions

    Economic CTV News
    BEIJING -- China has urged Washington to stop disrupting its foreign corporate acquisitions after President Barack Obama blocked the purchase of a German maker of semiconductor manufacturing equipment as a security risk. The proposed acquisition of Aixtron SE by China's Fujian Grand Chip was "pure market behaviour," a foreign ministry spokesman, Lu Kang, said Monday. Source
  • Families to spend more on groceries, restaurants in 2017: report

    Economic CTV News
    TORONTO - The typical Canadian family will spend up to $420 more on groceries and dining out next year, getting little relief from a recent drop in the cost of food, suggests a new report released Monday. Source
  • Notley aims to sell public on pipeline in B.C. in wake of protests

    Economic CTV News
    VANCOUVER - Some observers say Alberta's premier will have a difficult job trying to convince British Columbians to support a controversial pipeline project between the provinces. Rachel Notley is in B.C. for two days speaking with various media outlets about the Trans Mountain pipeline expansion project, which received federal approval last week. Source
  • Oil industry says carbon pricing coming, pump revenues back into cleaner tech

    Economic CTV News
    OTTAWA -- Canada's petroleum industry lobby group told the federal government this summer that carbon tax revenues from oil and gas should be pumped back into the industry in order to "not only preserve, but enhance" the sector. Source
  • Wages, full-time work sliding for young Canadians, StatsCan says

    Economic CBC News
    Unemployment rates among young Canadians have held relatively steady when compared with the mid-1970s, but the proportion of full-time or permanent jobs has changed sharply over that time, says Statistics Canada. In a study released Monday that looks at changes in the youth labour market from 1976 to 2015, Statistics Canada said the unemployment rate for the 15 to 24 age group averaged 13.2 per cent in 2015, slightly higher than the rate of 12.4 per cent seen in 1976. Source
  • Federal, Ontario governments talking 'investments' with Canada's big automakers

    Economic CTV News
    OTTAWA - The federal and Ontario governments are actively discussing major investments in the big automakers. Following the recent conclusion of labour negotiations, the auto companies are now in talks with the governments about investment opportunities in a sector that is a critical component of the Ontario and Canadian economies. Source