I hope everyone had a wonderful holiday season and will have a happy and safe new year. The funny thing about the financial markets is that there is no downtime. One year ends and another begins. So, we are right back at it after one day off. No time for breaks!
The first important event in the New Year will be earnings season. Earnings reports for the quarter ending today will start filtering in around mid-January. It could lead to a lot of fireworks and volatility.
The median expected growth for the S&P 500 in 2016 is 9.9%. This is led by big expected gains in consumer discretionary, materials, technology, and health care while energy is still forecasted to take it on the chin with a 6% decline.
I’m skeptical of these growth estimates for a variety of reasons. For one, the consumer isn’t any better off even with lower energy prices. Many retailers reported sub-par results last quarter.
Real median incomes are down substantially over the last 15 years, so any benefit from lower energy prices and a warmer winter is much less than it might have been the prior four decades. Consumers are feeling the pinch in other places and that’s eating up a lot of discretionary income and savings from lower energy prices.
One of those pinches is in healthcare. Anyone who has received their updated premiums likely saw huge increases for 2016. So, health care earnings may do ok. But, materials could be dragged down by global economic weakness and commodity prices.
As for technology, people tend to overestimate their earnings because they get sucked into the glossy growth story. The big tech companies like IBM and Oracle continue to have problems. And, the more multi-national the firm, the greater the impact of a strong U.S. dollar to weigh on earnings growth throughout 2016.
While the winter is a seasonally strong period for stocks, I think a poor January earnings season (with December 2015 results being reported) could be the first domino that falls and causes stocks to lose a lot of ground and momentum in early 2016. So watch out.
John Del Vecchio
Editor, Forensic Investor